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TREASURIES-Yields rise as Fed seen more tolerant of inflation
June 20, 2014 / 3:21 PM / 3 years ago

TREASURIES-Yields rise as Fed seen more tolerant of inflation

(Adds details, quotes, updates prices)
    * Prices fall in light trading
    * Economic data in focus next week
    * U.S. to sell $94 billion 2-, 5-, 7-year notes
    * Some short positions pared, hurting yields

    By Karen Brettell
    NEW YORK, June 20 (Reuters) - U.S. Treasuries yields rose on
Friday as the Federal Reserve was seen as tolerating more
inflation than had been expected, after a volatile two days of
trading sparked by a surprisingly dovish Fed policy statement on
Wednesday.
    Prices fell on Thursday after the government found weak
demand for 30-year Treasury Inflation-Protected Securities
(TIPS), with the weakness carrying into Friday.
    The U.S. central bank played down a recent uptick in
inflation on Wednesday.
    "There's the thought I think that maybe they will let
inflation run a little bit higher and not raise rates," said Dan
Mulholland, managing director in Treasuries trading at BNY
Mellon in New York.
    Data on Friday showed that higher energy costs pushed
Canada's annual inflation rate to a 27-month high of 2.3 percent
in May. 
    Treasuries yields have fallen this year despite a broad
expectation that they would rise, with short-covering by
investors that made bearish bets heading into the year seen as a
large driver of the rally.
    Some investors have been unwinding these losing positions,
however, which may be adding to recent bond weakness.
    "We're getting the feeling that some of the shorts are being
pared back, which means that positioning is becoming more
balanced and that's consistent with the modest increase in
yields that we've seen in the last few days," said Boris
Rjavinski, an interest rate strategist at UBS in Stamford,
Connecticut.
    "People that are stuck in these bad bearish trades are
coming to a realization that there will be no major relief in
sight in the following few weeks," Rjavinski said.
    Benchmark 10-year notes were last down 3/32 in
price to yield 2.63 percent, up from 2.62 percent late on
Thursday. The notes yielded 3 percent at the beginning of the
year.
    The long-dated yield curve flattened on Friday, after two
days of steepening, as investors repositioned trades in the wake
of the Fed statement.
    The curve between five-year notes and 30-year bonds
 flattened to 175 basis points, after earlier
rising to a two-week high of 179 basis points. It is up from a
five-year low of 165 basis points on Monday.
     With no major economic releases on Friday, investors are
focused on a number of indicators due next week, which cover
housing, manufacturing, durable goods, consumer confidence and
gross domestic product.
    The Treasury is also due to sell $94 billion in new debt,
including $30 billion in two-year notes on Tuesday, $35 billion
in five-year notes on Wednesday and $29 billion in seven-year
notes on Thursday.
    

 (Editing by Nick Zieminski; and Peter Galloway)

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