Bonds News

TREASURIES-Prices gain after slightly dovish Fed statement

 (Recasts with Fed statement; Adds quotes, updates prices)
    * Fed dovish on inflation, hints at balance sheet reduction
    * Treasury sells $34 bln five-year notes to strong demand
    * Three-month T-bill yields elevated on debt ceiling

    By Karen Brettell
    NEW YORK, July 26 (Reuters) - U.S. Treasury prices gained on
Wednesday after the Federal Reserve indicated that it is likely
to begin paring its balance sheet in the coming months and
struck a slightly dovish tone on inflation.
    The U.S. central bank said it expected to start winding down
its massive holdings of bonds "relatively soon." It also noted
that both overall inflation and a measure of underlying price
gains had declined and said it would "carefully monitor" price
    “They were very balanced,” said Aaron Kohli, an interest
rate strategist at BMO Capital Markets in New York. “They
acknowledged inflation weakness, which was the dovish part of
the statement, and they also kept a fairly tight leash on the
market by basically implying that they are ready to taper
relatively soon.”
    Many analysts and traders expect the Fed to announce its
balance sheet reduction plans at its September meeting.
    Futures traders are pricing in a 50-percent chance that the
Fed will raise rates at its December meeting, down from 52
percent before the statement, according to the CME Group's
FedWatch Tool.
    Benchmark 10-year notes             gained 11/32 in price to
yield 2.29 percent, down from 2.33 percent on Tuesday.
    The Treasury Department sold $34 billion in five-year notes
to solid demand on Wednesday, the second sale of $88 billion in
new coupon-bearing supply this week. A $26 billion sale of
two-year notes on Tuesday was also well bid.             
    Fund managers, foreign central banks and other indirect
bidders took their biggest share at five-year government note
auction in seven months.             
    The United States will also sell $28 billion in seven-year
notes on Thursday.
    Yields on one-month Treasury bills            rose above 1
percent. If the bill yields end the day above that level it will
mark the first time since before Lehman Brothers collapsed in
September 2008 that the entire U.S. yield curve has yielded over
1 percent.
    Yields on three-month Treasury bills            that are due
in October were also elevated on concerns that payments on debt
due in the month will be delayed if Congress fails to raise the
debt ceiling.
    The Congressional Budget Office said last month that
Congress would need to increase the debt limit by early to
mid-October to avoid a default.             
    Yields on Treasury bills            that mature on Oct. 26
last traded at 1.14 percent after rising to 1.20 percent on
Tuesday, the highest level since October 2008.

 (Editing by Lisa Shumaker)