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TREASURIES-Bonds fall on supply; Fed raises inflation view
April 27, 2011 / 9:39 PM / 6 years ago

TREASURIES-Bonds fall on supply; Fed raises inflation view

* Fed statement, Bernanke offer no policy surprises

* 30-year bond tumbles after Fed raises inflation view

* Average results at $35 billion five-year debt auction

* Advance 1st-quarter GDP, 7-year note auction on tap (Adds graphic links)

By Richard Leong

NEW YORK, April 27 (Reuters) - U.S. Treasuries fell on Wednesday as profit-taking and selling to make room for upcoming seven-year supply overshadowed the Federal Reserve’s pledge to hold short-term interest rates near zero.

The Fed’s increase to its inflation forecasts also hurt the market, hammering the 30-year bond price down by more than 1 point.

Fed Chairman Ben Bernanke’s first-ever news conference after a policy meeting produced no surprises as he spoke about the economy and monetary policy. He signaled another round of quantitative easing is unlikely with the current $600 billion bond purchase program, known as QE2, on track to end in June.

Long-dated Treasuries trailed short-dated issues on worries that the Fed’s adherence to ultra-loose policy to promote jobs and economic growth could leave inflation unchecked.

"With the front end effectively anchored with the continued inclusion of extended period language, it seems the potential for an inflation wild card, most likely in the form of commodity prices and oil, could be the dominant curve trade over the near term," said Christian Cooper, head of U.S. dollar rates trading at Jefferies & Co in New York. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Fed balance sheet: QE may flatten yield curve, QE2/S&P 500/10-year TIPS yield: Treasury issue/Fed bond purchase: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Wednesday’s sell-off snapped the market’s three-session winning streak that pushed yields to one-month lows by Tuesday. Traders reduced curve bets on long-dated bonds that were based on expectations that inflation will remain tame despite rising oil and commodity prices.

On Wednesday, Fed policymakers acknowledged inflation pressure from rising commodity prices but played down its impact as “transitory.” They maintained inflation expectations have remained “stable.”

Just before Bernanke started his conference, the U.S. central bank released its latest economic forecasts. It now sees core inflation running at 1.3 to 1.6 percent in 2011, higher than the previous range of 1.0 to 1.3 percent.

The 30-year bond US30YT=RR, which is most vulnerable to the market’s inflation outlook, fell 1-3/32 to yield 4.46 percent, up from 4.39 percent late on Tuesday.

Benchmark 10-year notes US10YT=RR shed 12/32 for a yield of 3.35 percent, up 3.31 percent on Tuesday.

Other market inflation measures ended flat to higher on the Fed’s latest inflation forecasts after falling on the perceived dovish slant in the Fed’s policy statement.

The 10-year breakeven rate, or the yield spread between 10-year Treasury Inflation-Protected Securities and regular U.S. government debt, was steady at 2.60 percentage points.

Earlier, investors making room for $35 billion of five-year notes, and a stronger-than-expected report on durable goods orders exerted initial downward pressure on bond prices.

Prices bounced up from session lows after the latest five-year note auction, part of this week’s $99 billion in coupon supply, was not as weak as some had feared.

On Thursday, the Treasury will sell $29 billion worth of seven-year notes, whose yield was 2.75 percent in when-issued trading US7YTWI=TWEB.

Investors will also receive the government’s first reading on gross domestic product and inflation in the first quarter.

Economists polled by Reuters predict GDP likely slowed to an annualized growth rate of 2.0 percent from 3.1 percent in the fourth quarter.

The core rate on personal consumption expenditure, the Fed’s preferred inflation gauge, likely accelerated by a 1.4 percent pace in the first quarter, compared with 0.4 percent in the prior quarter. (Additional reporting by Ellen Freilich; Editing by James Dalgleish)

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