June 19, 2012 / 3:31 PM / in 5 years

TREASURIES-Prices fall before closely watched Fed meeting

By Karen Brettell
    NEW YORK, June 19 (Reuters) - U.S. Treasury prices fell on
Tuesday as some investors closed out profitable positions before
the start of a Federal Reserve day meeting in a defensive move
in case the Fed does not announce any new stimulus measures.
    Yields rose off their lowest levels in around a week and a
half, ahead of the two-day policy meeting at which the U.S.
central bank is expected to indicate whether it will launch a
new bond purchase program.
    "There is some fear at the last minute that the Fed won't
act. ... They don't want to carry full positions into the event
if they are showing profits at this stage," said Carl Lantz,
interest rate strategist at Credit Suisse in New York.
    Price gains in the U.S. stock market also reduced demand for
safe-haven U.S. debt.
    U.S. benchmark 10-year notes were last down
12/32 in price to yield 1.61 percent, up from 1.57 percent late
on Monday. The yields have dropped from 1.66 percent a week and
a half ago, and from around 1.75 percent at the end of May.
    Thirty-year bonds fell 25/32 in price to yield
2.70 percent, up from 2.66 percent on Monday. They are down from
around 2.77 percent a week and a half ago and from 2.85 percent
at the end May.
    Trading volumes were light, which accentuated price moves,
and many investors were reluctant to take new positions before
the Fed issues its policy statement on Wednesday afternoon.
    "There's a school of camp that thinks nothing happens, a
school of camp says they extend their operation, and another
that says they do a full-blown quantitative easing," said Scott
Graham, head of government bond trading at BMO Capital Markets
in Chicago.
    "Unlike other operations from the Fed, the outcome from this
meeting is a lot less clear," he said.
    The Fed's Operation Twist program, in which it buys
long-term debt and funds the purchases with sales of short-term
notes in a move designed to bring down long-term interest rates,
expires at the end of this month.
    On Tuesday, the Fed bought $1.72 billion in debt due between
2022 and 2031 as part of the program.
    Weakening economic data has led many to expect the Fed will
launch new stimulus measures in order to protect against the
risk of the economy sliding into recession.
    Still, relatively solid inflation data and inflation
expectations have led some to conclude that the central bank
will hold off from a third round of quantitative easing.
    Quantitative easing is seen as a last resort for the Fed
because it involves the politically unpopular step of expanding
the Fed's balance sheet. 
    Other options may include extending Operation Twist for one
or more months at a time. The Fed could also expand the variety
of securities it purchases to assets including mortgage-backed
    Traders are also focused on a European Union summit
scheduled for the end of next week in Brussels for signs that
leaders in the region will take steps to forming a closer fiscal
and political union to address the region's debt crisis.
    "If they can show that they are on the road to a credible
fiscal union, even if it's many years away, then things may
start to be more forgiving over time," said Lou Brien, market
strategist at DRW Trading in Chicago.

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