December 4, 2012 / 8:51 PM / 5 years ago

TREASURIES-Bond prices rise on Fed buying but range holds

* Fed buys $1.84 bln long-dated bonds for Operation Twist
    * Corporate debt supply mitigates "fiscal cliff" jitters
    * Ten-year note yield supported at 100-day moving average

    By Ellen Freilich
    NEW YORK, Dec 4 (Reuters) - U.S. Treasuries prices rose on
Tuesday as some traders bought long-dated debt to resell to the
Federal Reserve after the central bank's latest purchase for a
bond program aimed at  lowering interest rates and helping the
economy.
    Slight losses in Wall Street stocks, after bigger losses on
Monday, also fed moderate safe-haven demand for U.S. government
debt, traders said.
    "You have the Fed buyback and stocks are a little weaker,"
said Thomas Roth, a senior Treasuries trader at Mitsubishi UFJ
Securities USA in New York.
    Primary dealers submitted a smaller-than-usual $4.047
billion in bonds for the U.S. central bank to buy. The Fed's
subsequent $1.837 billion purchase of Treasuries maturing
February 2036 to November 2042 caused these dealers, who do
business directly with the Fed, to scramble for longer-dated
issues on the open market, traders and analysts said.
 
    Even with Tuesday's moderate gains, the bond market held to
its recent trading range as most investors remained sidelined
before the year-end and with no obvious progress in Washington
to avert a set of automatic tax increases and spending cuts that
could further depress already slow U.S. economic growth.
    Competition from corporate bond supply and some early
preparation for next week's federal debt sales mitigated
concerns about the federal budget talks, analysts said.
    "When things are drifting like this, we see some money
gravitating to investment-grade corporate bonds," said Jim
Vogel, interest rate strategist with FTN Financial in Memphis,
Tennessee.
    With Treasury yields deliberately kept low by the Fed,
investors reach for more yield in riskier assets such as
investment grade corporate debt and lower-rated high-yield
bonds.
    Analysts expected companies to sell $25 billion in debt this
week, according to IFR, a unit of Thomson Reuters. 
    In afternoon trading, benchmark 10-year Treasury notes
 were up 3/32, their yields easing less than a
quarter of a basis point to 1.606 percent from 1.625 percent
late on Monday.
    The 10-year yield has found chart support at its 100-day
moving average at 1.65 percent, according to Reuters data.
    Wall Street stocks were narrowly lower in afternoon trading
on Tuesday after opening flat. 
    Bond prices erased initial losses tied to news that Greece
received better-than-expected terms for its debt buyback, which
stoked hopes it would continue to get financial help to avoid a
chaotic default and worsen the region's debt crisis.
 
    Treasuries have moved in a tight range since the U.S.
presidential election nearly a month ago.
    Traders are mindful of the so-called "fiscal cliff," a
series of tax increases and spending cuts worth $600 billion in
the new year unless the White House and Congress devise a
mutually acceptable alternative.
    On Tuesday, Republican leaders kicked two of the most
conservative members off the House Budget Committee, which was
perceived as a move to advance a deal with Democrats to cut the
federal deficit. 
    Jeff Given, portfolio manager at Manulife Asset Management
in Boston, seemed disinclined to place positions based on the
possible outcome of the political debate in Washington.
    "It's all guesswork anyway. Why do you want to stick your
neck out?" he said.
    Evidence of this caution was reinforced by J.P. Morgan's
latest Treasuries survey, which showed 70 percent of the firm's
clients were "neutral" or holding Treasuries equal to their
portfolio benchmarks on Monday. 
    Traders also tend to balance positions going into the
year-end.
    
    FED SEEN BUYING MORE BONDS
    The recession risks posed by broad-based tax rises and
spending cuts would only reinforce the Fed's policy of keeping
interest rates low. That would favor Treasuries, biasing them
toward higher prices and lower yields. That means any selling of
Treasuries is likely to be half-hearted.
    "We look at the output gap and the gap between inflation and
the unemployment rate and, certainly, for next year we can
expect the same accommodative Fed policy," said Steve Van Order,
fixed-income strategist at Bethesda, Md.-based Calvert
Investments with $12 billion in assets under management. "The
market reflects that and volatility is down."
    Fed policy-makers will meet next Tuesday and Wednesday,
where they are widely expected to decide whether to pursue
further bond purchases. 
    The Fed has been buying a combined $85 billion in Treasuries
and mortgage-backed securities a month. Its Treasuries purchases
have been linked to "Operation Twist," which expires at the end
of December. The operation involves the sale of short-dated debt
and buying of longer-dated issues on the open market.
    Short-term Treasury rates remained low, anchored by the
Fed's near zero interest-rate policy. General collateral repo
rates were firm overnight after last week's Treasury auctions
settled on Monday. Some large repo plays are starting in
connection with next week's auction of re-opened 10-year
Treasury notes, the terms of which will be announced on
Thursday, said Roseanne Briggen, analyst at IFR, a Thomson
Reuters unit.

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