September 16, 2013 / 4:41 PM / 4 years ago

TREASURIES-U.S. bonds rise after Summers quits pursuit of Fed job

5 Min Read

* Yellen now seen as front-runner as next Fed chief
    * U.S. yields fall to lowest levels so far in September
    * Futures signal traders pushing out timing on rate hike
    * U.S.-Russia pact on Syria seen paring safety bidsfor bonds

    By Richard Leong
    NEW YORK, Sept 16 (Reuters) - U.S. Treasuries debt prices
rose on Monday after the withdrawal by Lawrence Summers for
consideration as chairman of the Federal Reserve eased fears of
more aggressive monetary policy tightening if he were to head
the U.S. central bank.
    Bond yields fell to their lowest levels so far in September,
led by the yield on the five-year note, which fell 11
basis points. The interest rate on one-month bills dipped below
    The surprise withdrawal on Sunday by Summers, a former
Treasury secretary and former top economic aide to President
Barack Obama, came two days before Fed policymakers meet and
coincided with the five-year anniversary of the collapse of
Lehman Brothers. It was widely perceived as positive for bonds
as well as stocks. 
    Traders now expect the Fed's vice chair, Janet Yellen, will
be the front-runner to succeed Ben Bernanke, whose term expires
in January. It is expected that Yellen would continue the Fed's
likely slow, cautious approach to reduce its bond-buying
program, which is designed to stimulate the economy.
    "Assuming Janet Yellen moves to the fore, it should reduce
uncertainty across markets, increasing the likelihood of
continuity at the Fed and an ultra-smooth transition," said
Robert Tipp, chief investment strategist with Prudential Fixed
Income in New Jersey.
    A Yellen-led Fed would also likely mean the U.S. central
bank will take its time to raise short-term rates, even after it
halts the bond purchases.
    Summers's withdrawal lifted Yellen's perceived chances to
become the Fed's first female leader, but the White House has
not made a decision on its nominee. Other candidates who are
said to be still in contention for the job include Donald Kohn
and Roger Ferguson, both of whom are former vice chairs of the
    The shift in thinking about Fed leadership led to a sharp
drop in yields in short-dated Treasuries, which earlier this
month hit their highest levels since May 2011, partly on worries
over Summers as the next Fed chief.
    Fed policymakers will meet on Tuesday and Wednesday, when
Wall Street analysts anticipate they will decide on shrinking
their current monthly $85 billion in purchases of Treasuries and
mortgage-backed securities.
    Given the sluggish pace of the economic recovery, the
Federal Open Market Committee, the central bank's policy-setting
group, will likely opt for a small reduction in purchases,
according to economists and traders. 
    "A small tapering is in the offing, something in the order
of $10 billion. That's still a lot of stimulus coming to the
economy," said Kevin Giddis, head of fixed income capital
markets with Raymond James in Memphis, Tennessee.
    Monday's data on industrial output and regional
manufacturing suggested the U.S. economic recovery could manage
with less Fed stimulus.
    In the meantime, the Fed bought $927 million in Treasuries
due in November 2024 to February 2031, part of its planned $45
billion of Treasuries purchases in September.   
    In the U.S. government bond market, the impact of Summers's
withdrawal for consideration as Fed chairman was mitigated by a
pact between the United States and Russia to secure and rid
Syria of its chemical weapons under international supervision.
Fears over a possible U.S. military strike against Syria had
stoked safe-haven demand for bonds. 
    It is unclear whether the bond market rally can be sustained
heading into the Fed meeting, traders said.
    "I don't think it will go much further from here," said
Raymond James' Giddis. "For the bond market, it's shortcovering
with some people who were caught a bit by surprise with the
Summers announcement."
    On the open market, the yield on the two-year Treasury bill
 fell about 5 basis points from late Friday to 0.387
percent after hitting 0.375 percent earlier in overseas trading,
its lowest level in about 2-1/2 weeks.
    Longer-dated yields fell sharply, too. The benchmark 10-year
yield declined almost 7 basis points to 2.820
percent after earlier touching its lowest level in two weeks.
    In the futures market, traders dialed back expectations the
Fed will soon move away from its current near-zero interest rate
policy adopted in December 2008.\
    Federal funds futures implied traders priced in a 55 percent
chance of the central bank raising rates at the end of 2014
, down from 68 percent on Friday, according to CME Group's
FedWatch, which calculates traders' view on Fed policy.

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