* U.S. to sell $13 billion 30-year bonds on Thursday
* Tepid reception for 10-year Treasury auction
* Fed purchases $1.575 billion long-dated Treasuries
* Proposed U.S. budget deal seen reducing drag on economy
* Most economists see Fed tapering in early 2014-Reuters
By Ellen Freilich
NEW YORK, Dec 11 U.S. Treasury debt prices fell
on Wednesday as the market built in a price concession for the
Treasury's $13 billion 30-year bond auction on Thursday, the
final leg of the three-part $64 billion sale of government debt
The Treasury's sale of 10-year notes on Wednesday drew a
somewhat tepid bid which some tied to the proposed two-year
federal budget deal announced late Tuesday, which analysts said
could bolster the economy and offset the potential for less
stimulus from the Federal Reserve next year.
"People are setting up for tomorrow. The slightly weaker
than average non-dealer takedown for the 10-year auction also
played a role because dealers ended up purchasing more paper
than expected," said Justin Lederer, an interest-rate strategist
at Cantor Fitzgerald & Co in New York. "The market is definitely
thinner than normal, as would be expected with year-end rapidly
Lederer also said the Fed remains "the big question" for the
"I don't think they will taper at next week's policy
meeting, but it is certainly in play," he added.
The Federal Open Market Committee, the U.S. central bank's
policy-setting group, will convene next Tuesday and Wednesday as
policymakers will decide whether to scale back the current $85
billion in monthly purchases of Treasuries and mortgage-backed
securities, known as QE3.
Jennifer Vail, head of fixed-income research for U.S. Bank
Wealth Management in Portland, Oregon, said she believes the Fed
is "looking at a January taper, not a December taper."
"Yes, we see some strength in the labor market and some
signs that the housing market has not been destabilized by
higher mortgage rates. But we need a couple more prints showing
the modest housing recovery is still in place," she said.
Year-over-year inflation as measured by the core personal
consumption expenditure index remains at 1.1 percent, not in
negative territory, which is "reassuring," Vail said.
Inflation expectations as measured by the five-year forward
breakeven rate have also been stable, she added.
Some additional volatility could ensue as the market
continues to adjust its expectations about the Fed, Vail noted,
adding: "but we expect the 10-year yield to end the year in that
2.85 percent to 2.90 percent range."
The bond market's decline was tempered slightly by losses on
Wall Street - which often tend to boost demand for bonds - and
by the Fed's ongoing bond purchases. The U.S. central bank
bought $1.575 billion in Treasuries due in May 2038 to February
On the open market, the U.S. benchmark 10-year Treasury note
fell 11/32 in price while its yield rose to 2.85
The 10-year yield had climbed to 2.93 percent last Friday,
the highest since Sept. 11, in a reaction to a
stronger-than-expected jobs report for November.
The 30-year Treasury bond last traded 22/32
lower in price while its yield edged up to 3.88 percent. The
30-year yield touched 3.980 percent last Friday, its highest
since August 2011.
Investors' reaction to the proposed bipartisan budget
agreement in Washington was muted. If Congress does approve the
deal, which President Barack Obama supports, it might make it
easier for Fed policymakers to begin tapering QE3 early next
year, traders and analysts said.
Fed officials have cited the budget impasse as a reason to
not reduce bond purchases in September when Wall Street had
widely expected the FOMC to do so.
"While we continue to suggest some degree of caution due to
the highly polarized environment in Congress, we believe the
budget deal will be passed, removing a key impediment for the
Fed to begin tapering QE purchases in January," said Gennadiy
Goldberg, rate strategist with TD Securities in New York.
In a Reuters poll released on Wednesday, 32 economists
expect the Fed to taper QE3 in March, while 22 said it would
scale back its bond-buying program in January. Only 12
economists expected a tapering announcement next week.