April 29, 2009 / 8:19 PM / 9 years ago

TREASURIES-Bonds fall as Fed gives hopeful outlook

* Fed’s hopeful tone on economy helps stocks, hurts bonds

* Fed says contraction’s pace appears somewhat slower

* 30-yr yields above 4 pct for first time since November (Updates prices, adds quote, background)

By Burton Frierson

NEW YORK, April 29 (Reuters) - U.S. government bond prices fell on Wednesday, sending yields to 5-month highs, after the Federal Reserve sounded a hopeful tone on the economy in its post-meeting policy statement.

The statement supported those who see the economy going through a bottoming-out phase necessary for any recovery from the prolonged recession. [ID:nN29410693]

This is ultimately seen as good for risky assets such as stocks, but bad for conservative investments like bonds.

The statement also disappointed bond investors hoping that the Fed would announce an expansion of its program of buying Treasuries, which is part of its credit easing efforts and had helped keep yields from rising.

“Treasuries prices fell because the Fed’s statement has been adjusted to confirm its observation that some ‘green shoots’ of stability and potential improvement in the economic environment are evident,” said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.

“Also, some observers perhaps thought that the Fed would be able to increase the amount of Treasury and mortgage-backed securities purchases over and above the amount they delineated at the March policy meeting. So it doesn’t look as if they will increase the size of those purchase programs.”

The benchmark 10-year note US10YT=RR was last down 19/32 in price, pushing yields up to 3.09 percent from 3.02 percent late on Tuesday. Before the statement, it was down 2/32.

During the sell-off, 10-year yields rose as high as 3.12 percent, their highest since late November.

The 30-year bond US30YT=RR fell 1 full point on the day, but was last trading down 26/32, pushing yields up to 4.01 percent from 3.96 percent late on Tuesday.

It was the first time 30-year yields rose above 4 percent since November.

Recovery remained a distant prospect after data showed the U.S. economy contracted at a surprisingly steep 6.1 percent annual rate in the first quarter, which helped limit the extent of the bond market’s sell-off. [ID:nN29419669]

However, the possibility of a rebound, even if not immediate, could be bad for longer-term Treasuries in particular if markets believe growth and higher inflation are on the way eventually.

Reflecting those concerns, the spread of 10-year yields over two-year rates rose to its highest in five months at around 215 basis points.

Adding to long-end pressure, the Treasury said it would move to monthly auctions of 30-year debt from the current eight times per year to finance massive stimulus and financial rescue spending.

Analysts said supply would remain a heavy weight on bonds, even though the Federal Reserve committed in March to buy up to $300 billion in longer-term Treasuries over the coming months.

This week, investors have been digesting a record $101 billion in coupon securities supply and face another $71 billion during next week’s quarterly refunding sales.

Analysts expect $2 trillion worth of issuance this year as the U.S. government seeks to finance bank bailouts and economic stimulus measures.

This will make supply a heavy weight going forward even though there are sure to be reminders of the economy’s weak state, such as next week’s employment report, which is expected to show more than 600,000 jobs were lost in April.

“I think it will continue to weigh on the market,” Bulent Baygun, head of U.S. interest-rate strategy at BNP Paribas in New York, said about supply.

“But don’t forget that at the end of next week, we also have the employment report. Even if it’s very much in line with consensus (expectations), that could temper some of the optimism that is built into the market right now.” (Additional reporting by Ellen Freilich; Editing by Jan Paschal)

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