April 9, 2014 / 8:26 PM / 3 years ago

TREASURIES-Shorter-dated U.S. bond prices rise on Fed minutes

* FOMC minutes pare worries about rate hike in H1 2015

* U.S. yield curve steepens on reduced rate-hike bets

* Short, medium Treasuries yields fall to 3-week lows

* Weak 10-year note auction bogs down longer-dated debt (Adds market action after auction, FOMC minutes)

By Richard Leong

NEW YORK, April 9 (Reuters) - Short- and medium-term U.S. Treasuries prices rose on Wednesday as the record from the Federal Reserve's policy meeting in March soothed some worries the central bank might raise interest rates in the first half of 2015.

The perceived dovish tone of the minutes, from a March 18-19 Federal Open Market Committee meeting, sparked a wave of buying of short and intermediate government debt, pushing yields to their lowest levels in three weeks.

"The minutes proved some people in the market were off in their interpretation right after the FOMC meeting. People are readjusting now," said Brian Rehling, chief fixed income strategist with Wells Fargo Advisors in St. Louis, Missouri.

Short and medium-term Treasuries were pummeled three weeks ago when Fed Chair Janet Yellen told a post-meeting press conference the Fed might increase rates a "considerable time" after it completed its bond-purchase program, a period she defined as "around six months."

Investors dumped the maturities then, favoring longer-dated issues on the view that rising short-term rates would slow long-term economic growth and inflation.

This narrowed the gap between shorter- and longer-dated yields, flattening the yield curve. The yield difference between five-year and 30-years shrank to 1.81 percent in late March, which was the tightest since September 2009. That spread was 1.93 percent in late trading, according to Reuters data.

Longer-dated Treasuries also succumbed to selling after a poor 10-year note auction worth $21 billion, analysts said.

The U.S. Treasury Department will complete this week's coupon-bearing supply with a $13 billion sale of an older 30-year bond issue.

On the open market, two-year Treasuries were up 1/32 in price to yield 0.371 percent, down 3 basis points from late on Tuesday, while five-year notes rose 4/32 for a yield of 1.636 percent, down 3 basis points.

Benchmark 10-year Treasuries were down 6/32 with a yield of 2.704 percent, up 2 basis points from late on Tuesday, and the 30-year bond shed 22/32 in price, yielding 3.580 percent, up 4 basis points on the day.


The latest FOMC minutes seemed to show policy-makers wanted to cling to a near zero rate policy it adopted in December 2008 until the U.S. economy creates more jobs and an inflation rate that achieves its 2 percent target, analysts and traders said.

"The minutes were dovish in general. They downgraded their view on growth and are still worried about inflation not achieving its 2 percent target," said Bret Barker, portfolio manager at TCW in Los Angeles.

After the release of the minutes, Chicago Fed President Charles Evans said at an event in Washington the central bank should stick to its ultra-loose monetary policy.

Until the Fed's next meeting on April 29-30, the Treasuries market will likely bounce in a tight trading range with the 10-year yield holding in 2.60-2.80 percent, Barker said.

In the futures market, the June 2015 federal funds contract rose 2.5 basis points to 99.72, its highest level in more than five weeks.

That contract and related options implied traders were pricing a 45 percent chance of a rate increase at the June 2015 FOMC meeting, according to CME Group's FedWatch. This was a tad below the 50 percent chance late on Tuesday. (Reporting by Richard Leong; Editing by Paul Simao and Tom Brown)

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