February 4, 2014 / 8:00 PM / 4 years ago

TREASURIES-Yields rise from three-month lows as T-bills volatile

* Ten-year note yields increase, back above 2.60 percent
    * Fed buys $2.66 billion in notes due 2022-23
    * Fed to buy TIPS, Treasuries in two operations on Wednesday
    * U.S. sells 1-month bills at highest yields since October

    By Karen Brettell
    NEW YORK, Feb 4 (Reuters) - Treasuries yields rose from
three-month lows on Tuesday as pressure on stocks and emerging
market assets eased, reducing safe-haven demand for U.S.
government debt.
    Treasuries have benefited in the past week from a
flight-to-safety bid as worries over high deficits in emerging
economies as well as the impact the U.S. Federal Reserve's
pullback in stimulus would have on investment there, caused
investors to flee those higher-risk assets.
    Some of those jitters appeared to ease on Tuesday, helping
stocks gain and reducing some demand for U.S. government debt.
    "The whole catalyst for the (bond) rally in the last week or
so has been 'risk off' in their markets, concern over emerging
markets and equities in general. As you see them rallying back
today its taking some of the flight-to-quality bid out of our
market," said Rick Klingman, a Treasuries trader at Societe
Generale in New York.
    U.S. benchmark 10-year Treasury notes were last
down 12/32 in price to yield 2.63 percent, up from 2.58 percent
late Monday. The yields have fallen from over 3 percent at the
start of the year, but have struggled to stay below the 2.60
percent level where there is technical resistance.
    Thirty-year bonds fell 1-5/32 in price to yield
3.60 percent, up from 3.54 percent on Monday.
    Some concerns over economic strength also hit the U.S. on
Monday after a report showing U.S. factory activity was weaker
than expected sent equity markets reeling and benchmark 10-year
note yields to their lowest levels since the beginning of
    Investors are now grappling with whether disappointing
economic data will extend into Friday's highly anticipated U.S.
jobs report for January.
    Many traders and analysts see it as unlikely that the jobs
data will sway the Fed from the course of reducing its asset
purchases unless it is much weaker than currently expected.
    "I think we would need a dramatic weakening in labor
conditions to put (tapering) on hold," said Michael Cloherty,
head of U.S. rates strategy at RBC Capital Markets in New York.
    Employers are expected to have added 185,000 jobs in
January, according to the median estimate of 101 economists
polled by Reuters.
    The Fed last week cut its monthly bond purchases by $10
billion, to $65 billion.
    Richmond Federal Reserve President Jeffrey Lacker said on
Tuesday that it would be hard to make the case for a pause in
    Chicago Federal Reserve Bank President Charles Evans also
said that only a sharp economic downturn or unexpected rise in
inflation could force the Fed to pause or speed up the pace at
which it is cutting the program.
    The Fed bought $2.66 billion in notes due 2022 and 2023 on
Tuesday as part of its ongoing purchase program.
    It will conduct two operations on Wednesday, including
purchasing between $0.85 billion and $1.15 billion in Treasuries
Inflation-Protected Securities (TIPS) due from 2018 to 2043, and
between $2.5 billion and $3.0 billion in Treasury notes due 2019
to 2021.
    Some dislocations were also seen in the Treasury bills
market on Tuesday as investors again pulled back from certain
debt at risk of default if U.S. lawmakers are unable to increase
the country's debt ceiling.
    U.S. Treasury Secretary Jack Lew said on Monday that the
government could start defaulting on the government's
obligations "very soon" after it runs out of room to borrow
under a legal cap on public debt.
    Washington is due to reinstate a limit on its borrowing at
the end of this week and Lew said the administration could use
accounting measures to stay under the new cap until the end of
    The government has been reducing its short-term debt
issuance heading into next week's deadline, as it has faced
restrictions on selling debt that is not needed for immediate
expenses. Increased issuance of short-term debt after the
deadline may add pressure to the bills that are most at risk of
delayed payments.
    "We're seeing some dislocations in the bill curve with the
March bills trading cheap, I think we'll see much more acute
dislocations next week," said RBC's Cloherty.
    The U.S. sold $8 billion in one-month Treasury bills on
Tuesday at the highest interest rate since mid-October, $2
billion less than the previous week's auction and the fewest
notes since April 2008.
    The Treasury said it would pay dealers and investors 0.13
percent on the bills due on March 6. This was the highest
interest rate it paid on one-month bills since the 0.24 percent
on $20 billion in one-month T-bills auctioned on Oct. 16.
    On-the-run one-month Treasuries bills that come due on Feb.
27 yielded 4 basis points on Tuesday, up from half a
basis point two weeks ago.
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