August 29, 2014 / 6:45 PM / in 3 years

TREASURIES-Bonds stable, pausing rally, as ECB meeting in focus

(Adds details, quote, updates prices)
    * Bonds steady after week-long rally
    * ECB may disappoint markets by not announcing QE
    * German finance minister warns on limits of central bank
    * British terrorism alert adds safety bid

    By Karen Brettell
    NEW YORK, Aug 29 (Reuters) - Treasuries were steady on
Friday, pausing a week-long rally, as investors remained focused
on next week's highly anticipated European Central Bank meeting.
    Comments by ECB President Mario Draghi last Friday were
interpreted by some market participants as indicating that the
central bank had changed forecasts on inflation lower, and that
it may be more likely to embark on new quantitative easing to
stave off a decline.
    That has helped German goverment bond yields plunge to
record lows, pulling Treasuries yields also lower with them.
    But others say that such a move by the ECB is unlikely and
market gauges that central banks watch, such as five-year,
five-year forward breakeven inflation rates, still indicate
inflation to be near the central bank's 2 percent target in the
    Treasuries are likely to continue following European bonds
next week, with a risk that disappointment after the ECB meeting
could send yields higher.
    "If the market rallied in Europe because he was going to do
it does the backend in Europe sell off hard because he hasn't
done it?," said Richard Gilhooly, an interest rate strategist at
TD Securities in New York.
    "Even if he doesn't do anything next week he's still going
to talk about what they will do, and get the market bulled up on
that," Gilhooly added.
    German Finance Minister Wolfgang Schaeuble said in comments
published on Friday that the central bank has run out of tools
to fight deflation, and that liquidity in markets may be too
    Treasuries also gained a safety bid after Britain raised its
terrorism alert to the second-highest level with Prime Minister
David Cameron saying the Islamic State (IS) group operating in
Syria and Iraq posed the country's greatest ever security risk.
    Month-end buying also added to demand for U.S. bonds.
    "There are no sellers, (the market) is bid and its been bid
for some time," said Charles Comiskey, head of Treasuries
trading at Bank of Nova Scotia in New York.
    The ECB meeting and geopolitical concerns including tensions
in Ukraine are likely to remain the market's focus next week
even as next Friday's U.S. employment report for August comes
into view.
    Benchmark 10-year Treasuries were last up 2/32
in price to yield 2.33 percent.

 (Editing by Chizu Nomiyama)

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