January 9, 2014 / 8:20 PM / in 4 years

TREASURIES-U.S. bond prices rise on solid 30-year bond auction

* U.S. $13 billion 30-year bond sale fetches solid demand
    * U.S. jobless claims fall to lowest since November
    * Fed's George uneasy about continued QE3 bond program
    * Fed's Yellen sees 3 percent U.S. GDP in 2014 -magazine

    By Richard Leong
    NEW YORK, Jan 9 (Reuters) - U.S. Treasuries prices rose on
Thursday as a $13 billion auction of 30-year bonds drew solid
investor demand, even as the recent wave of upbeat economic data
have signaled bond yields might climb higher.
    Perceived dovish comments from European Central Bank
President Mario Draghi lifted German Bund prices, which in turn
helped boost U.S. government debt, analysts and traders said.
    Most of the initial price rise in longer-dated Treasuries
stemmed from the notion that the Federal Reserve might raise
short-term interest rates from their near-zero level sooner than
some traders had previously thought. 
    These curve "flatteners" bet shorter- and medium-term yields
would rise faster than long-dated ones, even after the Fed
decided in December to pare its monthly purchases of Treasuries
and mortgage-backed securities by $10 billion to $75 billion.
    "The front end of the yield curve might test the Fed's
resolve to keep short-term rates low if unemployment falls at
its current pace," said Mike Cullinane, head of Treasuries
trading with D.A. Davidson in St. Petersburg, Florida.
    According to CME FedWatch, short-term U.S. interest rates
futures implied traders now assign a 65 percent probability for
the first Fed rate hike as early as April 2015, compared with 63
percent on Wednesday. 
    Fed officials in recent days stressed that the U.S. central
bank will likely leave short-term rates near zero for some time
even as it reduces its bond purchases.
    The Fed on Thursday bought $824 million in Treasuries that
mature in 2024 to 2031 as part of its expected $40 billion
purchase of U.S. government debt in January. 
    Kansas City Fed President Esther George, known for her
hawkish view on interest rates, said on Thursday "I remain
concerned about the potential costs and consequences of these
untested policies." She was speaking to bankers in Madison,
    Benchmark 10-year Treasury notes last traded up
7/32 price to yield 2.967 percent, down 3 basis points from late
on Wednesday. Just last week, the 10-year yield hit a near
2-1/2-year high of 3.041 percent, according to Reuters data.
    Amid a wave of curve flatteners, the yield spread between
five-year and 30-year Treasuries shrank to 2.12 percent, the
tightest level in four months.
    Financial markets will receive a broad snapshot of U.S.
labor conditions on Friday at 8:30 a.m. (1330 GMT) when the
Labor Department releases its December payrolls report.
    U.S. employers picked up hiring at the end of 2013, helped
by the housing recovery and rising exports.
    Wednesday's ADP private-sector payrolls report and
Thursday's weekly jobless claims figures supported the view of
ongoing improvement in jobs growth.
    The U.S. Labor Department said first-time filings for
unemployment benefits totaled 330,000 last week, the lowest
weekly level since late November. The ADP National Employment
Report showed private jobs grew by 238,000 in December, the
biggest monthly rise in 13 months. 
    Economists polled by Reuters forecast employers likely added
196,000 jobs, down from 203,000 in November, while the jobless
rate likely held at a five-year low of 7.0 percent. 
    With an improving labor backdrop, Janet Yellen, set to take
over as the head of the Federal Reserve from Ben Bernanke in
February, is "hopeful" that U.S. economic growth will improve in
2014 to reach 3 percent or more and persistently low inflation
will move up toward the central bank's target of 2 percent,
according to a Time magazine interview released Thursday.
    Yellen's ECB counterpart Mario Draghi rang a more cautious
note on the euro zone economy where inflation is sagging further
into a "danger zone" below 1 percent. Draghi signaled at a press
conference the ECB is ready to do more to prevent further
slowing in price growth. 
    Ahead of Friday's critical payrolls report, it was unclear
how aggressively investors would bid for the latest supply of
30-year Treasury bonds, the last leg of this
week's $64 billion in coupon-bearing supply.
    Primary dealers, top Wall Street firms that do business
directly with the Fed and make a market for Treasuries, ended up
buying only 38 percent of the 30-year Treasuries supply, below
the 12-month average. This also implied solid demand from large
investors and foreign central banks. 
    "This is was a fairly strong auction," Jefferies & Co. money
market strategist Thomas Simons wrote in a research note.
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