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TREASURIES-Prices rise, curve flattens on rate hike speculation
March 21, 2014 / 7:10 PM / 3 years ago

TREASURIES-Prices rise, curve flattens on rate hike speculation

(Adds quotes, details, updated prices)
    * Yield curve flattens as short, intermediate-dated debt
underperforms
    * Fed's Bullard said Yellen's six-month view in line with
private surveys
    * Five-year note yields hold near two-month highs before
supply
    * Fed buys $1.23 bln bonds due 2036-2044

    By Karen Brettell
    NEW YORK, March 21 (Reuters) - Longer-dated U.S. Treasuries
prices rose on Friday and the gap between short and long-dated
bonds hit its lowest level in eight months as investors
continued to evaluate the possibility the Federal Reserve will
increase benchmark rates sooner than had been expected.
    The yield curve has flattened since Wednesday, when Fed
Chair Janet Yellen said the central bank could raise rates six
months after its current bond-buying program ends. The spread
between two-year note- and 30-year bond yields narrowed to 317
basis points on Friday, the tightest since July.
    "We've seen a continuation of the flattening trend that
began post Fed meeting on Wednesday, the timeline for potential
tightening is moving up," said Dan Mulholland, managing director
in Treasuries trading at BNY Mellon in New York.
    The curve flattening was amplified by investors exiting a
popular steepening trade that was meant to benefit from
longer-dated notes underperforming shorter-dated ones, he added.
    Thirty-year bonds extended price gains and the yield curve
flattened further after St Louis Fed President James Bullard
said Yellen's six-month comment was in line with private sector
surveys.
    Bullard was one of a quartet of Fed officials that were
watched on Friday for further signs over Fed policy after
Wednesday's surprise remarks.
    Intermediate Treasuries yields held just under two-month
highs with the Treasury poised to sell $96 billion in new
coupon-bearing supply next week, including two-year and
five-year notes, which have been the worst performers since
Yellen's comments.
    Two-year note yields have risen to around 44
basis points from 34 basis points before Yellen's statement.
    "If they are looking to raise rates in spring 2015 two year
notes at 44 bps still look pretty rich," said Jason Rogan,
managing director in Treasuries trading at Guggenheim Partners
in York.
    Five-year note yields, which are the most
sensitive to Fed policy, have increased to 1.72 percent from
1.54 percent before Yellen spoke.
    The Treasury will sell $32 billion in two-year notes on
Tuesday, $35 billion in five-year notes on Wednesday and $29
billion in seven-year notes on Thursday, in addition to $13
billion in reopened two-year floating rate notes on Wednesday.
    Of the Fed speakers on Friday, Minneapolis Fed President
Narayana Kocherlakota, told the Wall Street Journal the Fed was
not moving to a more hawkish stance. 
    The lone dissenter to the Fed's policy decision this week
said in prepared remarks early on Friday that the U.S. central
bank should have promised to keep rates near zero until U.S.
unemployment falls below 5.5 percent, as long as inflation and
financial stability risks are contained. 
    Dallas Fed chief Richard Fisher, a frequent critic of the
U.S. central bank's super-easy monetary policy, questioned the
basis of forward guidance, which rests on giving markets a
better sense of the future path of interest rates.
 
    Bullard also said that using monetary policy to target a
specific rate of economic growth poses challenges including the
difficulty of knowing how fast the economy really should be
growing. 
    Kocherlakota is due to speak again later on Friday as is Fed
Governor Jeremy Stein. FED/DIARY
    The Fed bought $1.23 billion in bonds due from 2036 to 2044
on Friday as part of its ongoing purchases. It will buy between
$2.25 billion and $2.75 billion in notes due 2021 and 2024 on
Monday.

 (Editing by Tom Brown)

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