December 11, 2012 / 9:21 PM / 5 years ago

TREASURIES-Prices drop on U.S., Europe hopes; Fed eyed

* Three-year note auction draws record low yields
    * German ZEW sentiment index rises sharply for December
    * Fed expected to announce more Treasuries buying on

    By Luciana Lopez and Richard Leong
    NEW YORK, Dec 11 (Reuters) - U.S. Treasuries fell on Tuesday
as investors saw signs of hope in budget talks in Washington and
in the German economy, ahead of expected easing announcement
from the Federal Reserve on Wednesday at the conclusion of its
two-day meeting.
    Investors saw flickers of progress in reports of a pick-up
in the pace of talks to avert the U.S. "fiscal cliff" of steep
tax hikes and spending cuts set for the new year, although
Republicans and Democrats remain far apart. 
    "There's always a concern about a deal not getting done.
It's a cat-and-mouse game in Washington right now, but you hope
things are moving along," said Sean Simko, head of fixed income
management at SEI Investments Co in Oaks, Pennsylvania.
    Benchmark 10-year Treasury notes were trading
10/32 lower in price to yield 1.652 percent, the highest in
about two weeks. 
    Thirty-year bonds were 26/32 lower in price to
yield 2.838 percent, up from 2.80 percent on Monday.
    Still, investors this week will focus on Wednesday's
conclusion to the Federal Reserve's two-day policy meeting,
which is widely expected to produce another bond-buying program.
    A new program could take effect once the current Operation
Twist stimulus program finishes at month-end, Nomura analysts
    "We expect additional purchases of Treasuries to match the
size and pace of notional purchases ($45 billion/month) of
Operation Twist," they wrote.
    Half the respondents in a Reuters poll on Friday said they
too expected $45 billion per month in buying through a new round
of Treasury securities purchases. 
    An unexpectedly strong reading on German investor sentiment
also nudged investors toward riskier assets such as stocks. 
    Germany's ZEW economic sentiment index jumped to 6.9 in
December, far higher than the -12.0 forecast and the previous
reading of -15.7.    
    Italian markets, jittery on Monday after Prime Minister
Mario Monti's decision to step down early, also proved calmer on
    Treasuries held early losses after a three-year note auction
attracted lukewarm bidding, as a record low yield perhaps
deterred some potential buyers.
    The U.S. Treasury sold $32 billion of three-year notes
 at a high yield of 0.327 percent, with a
below-average bid-to-cover ratio of 3.36. 
    "Obviously it was on the rich side, and I think that
probably contributed to some of the fairly lackluster bidding,"
said Kim Rupert, managing director of global fixed income
analysis at Action Economics LLC in San Francisco.
    In addition, the Treasury will sell $21 billion in 10-year
notes on Wednesday and $13 billion in 30-year bonds on Thursday.
Traders typically push for lower Treasury prices heading into
such auctions.

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