June 18, 2014 / 7:40 PM / 4 years ago

TREASURIES-Prices gain as Fed more dovish than expected

(Adds comments from Yellen, updates prices)
    * Short-covering seen fueling rally, 2-year notes 'special'
    * Yield curve steepens, intermediate debt outperforms
    * Fed to buy $2.25 bln-$2.75 bln notes 2021-2024 Thursday

    By Karen Brettell
    NEW YORK, June 18 (Reuters) - U.S. Treasuries prices gained
on Wednesday after the Federal Reserve took a more dovish stance
on monetary policy than some had expected at its June meeting, a
day after data showed inflation pressures are rising.
    Prices had tumbled on Tuesday after a higher-than-expected
consumer price inflation indicator led investors to prepare for
the possibility that the Fed will be open to raising rates
sooner than some had thought.
    But the U.S. central bank didn't note any inflation
concerns, and kept its statement little changed from the one it
issued after its previous meeting.
    "There were a lot of people that thought there would be a
lot more mention of inflation there, that there would have been
a more hawkish tone, but on balance it came out fairly dovish,"
said Aaron Kohli, an interest rate strategist at BNP Paribas in
New York.
    Fed Chair Janet Yellen said after the statement that recent
data is "noisy," adding that "inflation is evolving in line with
the committee's expectations". 
    Bonds gained before the statement, and the yield curve
steepened, with traders attributing much of the move to
investors covering bearish bond bets.
    Two-year notes traded "special" on Wednesday, or at negative
interest rates, in the repurchase agreement market (repo),
indicating a number of investors were short the notes. 
    "We're seeing a little bit of short-covering," said Jason
Rogan, a managing director in Treasuries trading at Guggenheim
Securities in New York.
    Treasuries weakened immediately after the statement in
choppy trading, before resuming their rally.
    "The statement itself was utterly predictable," said Brian
Jacobsen, chief portfolio strategist, investments group, at
Wells Fargo Funds Management in Menomonee Falls in Wisconsin.
"More interesting was the timing as far as when they will start
raising rates. There was an ever so slight shift to being more
    Benchmark 10-year notes gained 12/32 in price to
yield 2.61 percent, just lower than before the statement.
Five-year notes rose 7/32 in price to yield 1.71
percent, little changed from before the statement.
    The yield curve between five-year notes and 30-year bonds
 steepened back to 172 basis points, near where it
had traded before the statement.
    The Fed hinted at a slightly faster pace of interest rate
increases starting next year, but suggested rates in the long
run would be lower than it had indicated previously.
    The central bank slashed its economic growth forecast to a
range of between 2.1 percent and 2.3 percent from an earlier
forecast of around 2.9 percent, but it expressed confidence the
recovery was largely on track.
    It also reduced its monthly asset purchases from $45 billion
to $35 billion a month, divided between $20 billion of Treasury
securities and $15 billion of mortgage-backed debt, as widely
    On Thursday, the Fed will buy between $2.25 billion and
$2.75 billion in notes due from 2021 to 2024.

 (Additional reporting by Rodrigo Campos; Editing by Nick
Zieminski; and Peter Galloway)

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