June 28, 2013 / 4:46 PM / in 5 years

TREASURIES-Prices drop as downbeat quarter draws to a close

* Payrolls figures key for start of next quarter
    * Bond funds have seen huge outflows
    * Fed officials continue to try to soothe markets

    By Luciana Lopez
    NEW YORK, June 28 (Reuters) - The prices of benchmark U.S.
Treasuries fell in choppy trading on Friday, capping a week when
prices began to stabilize after yields shot to a near two-year
high on a recent Fed-induced selloff.
    With month- and quarter-end activity adding to volatility,
Treasuries looked set to close out their worst quarter since the
start of 2012.
    Coming sessions could stay choppy, too, said Justin Lederer,
strategist at Cantor Fitzgerald in New York, especially going
into next Friday's payrolls report. 
    "That could definitely set the tone for a date for QE," he
added, referring to the timing of the Fed's potential pullback
from its bond-buying program, known as quantitative easing. 
    "I wouldn't be surprised if we tried to touch the high
yields again, but it's just dependent on data and what goes on
around the world," Lederer said.
    The quarter proved a challenging one for Treasuries. The
slump in prices started in May, gaining momentum when Fed
Chairman Ben Bernanke suggested that the bank could be looking
for an exit from QE.
    But the magnitude of the selloff became a stampede last
week, when Bernanke said more emphatically that the Fed could
begin slowing its $85 billion per month of bond purchases this
year as the economy improves.
    The iShares Barclays 20-year-plus exchange-traded fund
, one of the most popular bond ETFs, is on track for a
loss of about 7.24 percent for the quarter, its worst drop since
the first quarter of 2012.    
    However, Fed officials speaking this week have taken pains
to reassure investors that the U.S. central bank will not halt
all its stimulus measures at once, with policymakers not yet
ready to raise interest rates for months or even years yet.
    Among the latest voices in the Fed chorus was Governor
Jeremy Stein, who said the bank must consider overall economic
improvements since it launched the stimulus and not give undue
weight to the most recent economic data. 
    A longer view is needed for the Fed's policy-setting
committee to make a good judgment and to avoid undue market
volatility, Stein said, according to prepared remarks for
delivery to the Council of Foreign Relations.
    Jeffrey Lacker, the president of the Federal Reserve Bank of
Richmond, also spoke on Friday, pointing out that markets should
brace for more volatility as investors weigh news that the
central bank will pull back bond buying later this year. This is
a normal adjustment and should not derail growth, he added.
    The benchmark 10-year U.S. Treasury note's yield 
has backed away from the 22-month high of 2.67 percent reached
on Monday. On Friday, the 10-year note fell 9/32 in price to
yield 2.508 percent, compared with 2.4758 percent late on
    Even so, the yield remains significantly higher than the
2.20 percent area it traded at before Bernanke's comments last
week, and above 1.60 percent at the beginning of May.
    Bond funds have struggled in recent weeks. Investors in
funds based in the United States pulled $8.62 billion out of
taxable bond funds in the latest week, marking the first
four-week streak of outflows from the funds since 2008, data
from Thomson Reuters' Lipper service showed on Thursday.
    But some analysts said the Fed might find it harder than
markets realize to slow its purchases of Treasuries and
mortgage-backed securities.
    The Fed plans to pull back "only if the U.S. economy offers
a combination of lower unemployment, faster growth and stable
inflation," wrote HSBC Economists Stephen King and Madhur Jha in
a report. "The Fed's own forecasts suggest this holy trinity may
now be within reach. Our forecasts suggest otherwise."
    As if to underscore that point, the Chicago Purchasing
Management Index fell to 51.6 points in June, lower than the
56.0 economists had forecast and below the 58.7 in May.
    "Over the past three to four months, a variety of economic
indicators have suggested that the economy lost momentum at the
end of Q1 and beginning of Q2," said Thomas Simons, money market
economist at Jefferies & Co in New York.
    "We are optimistic about a recovery in the manufacturing
sector in the second half of the year, but the path to growth
will not be free of bumps," he said.    
    The government's payrolls data for the month of June, set
for release next Friday, will be closely watched by investors.
The release comes one day after the U.S. Independence Day
holiday, which may reduce volumes and make trading on the number
more volatile.
    As part of its stimulus efforts, the Fed on Friday bought
$1.46 billion of Treasuries maturing between February 2036 and
November 2042.
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