* Treasury sold $32 billion in 2-year notes to good demand
* Fed purchased $1.575 billion in Treasury coupons
* Market awaits Fed policy decision due Wednesday
* November consumer price data shows subdued inflation
By Steven Norton
NEW YORK, Dec 17 U.S. government bond prices
held on to gains Tuesday after the Treasury sold $32 billion in
two-year notes on good demand and investors waited for a policy
statement from the Federal Reserve later this week.
The two-year notes sold at a high yield of 0.345 percent,
below the level they were trading at before the auction. The
sale fetched the strongest bid-to-cover ratio since January.
"This was pretty much a grade A auction," said Stanley Sun,
U.S. rates strategist at Nomura in New York. "Plus liquidity is
relatively thin, so it wouldn't be a surprise if people were
buying the front end through the auction process."
The sale was aided by demand for low-risk Treasuries as
traders focus on what the Fed will say Wednesday about the
future of its bond buying program. Any kind of surprise from the
central bank about holding policy rates longer than expected
would likely anchor the front end of the yield curve.
Many analysts expect a tapering announcement from the Fed
in the first quarter of next year, but have acknowledged that a
move to trim bond-buying this week is not out of the question.
"I put the probability of a tapering in December at 20
percent, January at 40 percent and March at 80 percent," said
Thomas di Galoma, co-head of fixed-income rates at ED&F Man
Capital in New York.
A Reuters poll last week showed 32 economists forecast the
U.S. central bank would act in March, while 22 said it would
scale back its $85 billion monthly bond-buying program in
January. Twelve economists expected a tapering announcement this
"All they need to do is get the ball rolling," said Lou
Brien, market strategist at DRW Trading in Chicago. "It's stuck
where it is and I don't think it's doing anyone any favors
because we're just waiting for the announcement."
On the open market, benchmark 10-year Treasury notes
were up 8/32, their yields at 2.848 percent. The
30-year bond price was up 11/32, yielding 3.876
The government's report that consumer prices were flat and
the Consumer Price Index only notched modest gains indicated the
U.S. central bank could be flexible in determining when it might
reduce the large-scale purchases of Treasuries and
mortgage-backed securities it has been making to try to
stimulate lending and economic activity.
Recent data showing lower unemployment and improved economic
indicators support an argument for the Fed to begin trimming its
bond purchases, though a third element - lower inflation than
the Fed wants - could prove to be a stumbling block.
As part of that ongoing purchase program, the Fed bought
$1.575 billion in Treasury coupons on Tuesday.
Dealers face a continued wave of supply this week. The
Treasury will sell $35 billion in five-year debt ;
$29 billion in seven-year notes ; and $16 billion
in five-year Treasury Inflation-Protected Securities
. The five-year auction will
begin at 11:30 a.m. EST on account of the Fed statement.