TREASURIES-Investors return but yields seen rising further

LONDON, Sept 18 Tue Sep 18, 2012 2:21pm IST

LONDON, Sept 18 (Reuters) - U.S. Treasury prices rose on Monday as a recent sharp sell-off lured investors back into the cheapened market but yields were seen creeping higher towards year-end.

* U.S. 10-year yields fell 3 basis points to 1.82 percent, while 30-year yields were little changed at 3.03 percent.

* "We had seen a huge rally in risk markets up to the end of last week. We seem to have taken a bit of a pause for breath now as the market assesses the impact of ECB and Fed measures," RIA Capital Markets bond strategist Nick Stamenkovic said.

* The Federal Reserve launched another aggressive stimulus programme last week, while the European Central Bank earlier this month said it would buy unlimited amounts of bonds of struggling euro zone sovereigns, if countries asked the euro zone rescue fund for financial help first.

* Despite the rebound in bond prices, Stamenkovic still expected 10-year yields to end the year at around 2 percent.

* "But I wouldn't be recommending, at the current level of yields, adding significant short (selling) positions. I would wait for a bit of a pull-back i.e. yields to fall down further, maybe to the 1.70 level or below, before implementing shorts again," he added.

* The U.S. central bank's decision to tie its controversial bond buying directly to economic conditions was an unprecedented step that marked a big escalation in its efforts to drive U.S. unemployment lower.

* The Fed's emphasis on employment and its pledge to pursue an easy monetary policy "for a considerable time" even after the economy strengthened suggested it was willing to tolerate some possible inflation in the name of employment and growth, market participants said.

* Treasury yields would thus have to rise further in order to adjust for that possibility, one trader said: "The market needs to reprice in inflation expectations and inflation expectations don't exist at 1.83 or 1.80 10-year yield."

* To prepare for that risk, 10-year yields would have to rise to 2.50 percent, he said. "It's pretty aggressive but I think that's a three-to-six month process," the trader added.

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