March 20, 2012 / 8:17 PM / 5 years ago

TREASURIES-Long bond yields fall, but higher yields may lie ahead

* New range for Treasury yields has yet to be defined - RBS
    * TD sees new 10-yr yield range from 2.10 pct to 2.53 pct
    * U.S. housing starts fall in February but permits rise

    By Emily Flitter	
    NEW YORK, March 20 (Reuters) - U.S. Treasury debt prices
posted modest gains on Tuesday, but selling still pushed some
yields to multi-month highs as traders focused on the idea that
a stronger economy could mean quicker inflation and monetary
policy tightening sooner than expected.	
    Price losses were limited, however, and gains returned to
the longest-dated U.S. debt - 10-year notes and 30-year bonds.	
    Recent data has revealed slightly more strength in the U.S.
economy than many economists were expecting. While the Federal
Reserve has remained inclined to keep rates low, market hopes
that it will do another round of quantitative easing are fading.	
    Economic optimism often means pessimism for Treasuries'
performance. Tuesday's extension of the recent Treasuries rout
pushed the five-year yield to levels last seen on Aug. 8, 2011.	
    "You are going to trade horizontally over the next couple of
days, and then it's going to be a test of the 2.53 percent
10-year yield mark," said Eric Green, chief economist and head
of rates strategy at TD Securities in New York.	
    "The risk is, if you get up toward 2.48 percent, you could
create a reinforcing move that could get out of hand really
quickly in terms of the sell-off getting stretched," he added.	
    Treasury yields, kept low for nearly four months by dovish
signals from the Fed, began rising after the Federal Open Market
Committee's March 13 monetary policy-setting meeting did not
result in another round of easing measures.	
    "People are starting to hedge against the idea that we could
be looking at much higher rates," said Rick Klingman, a Treasury
trader at BNP Paribas in New York.	
    "The selling is coming not only in the seven- to 10-year
part, but also in the three- to five-year part. There are some
real adjusting thoughts going on for how long the Fed will be on
hold."	
    The latest sign of economic strength came bundled in data on
housing starts for February. The Commerce Department said U.S.
housing starts fell in February, but permits for future
construction jumped to their highest since October 2008.
 	
    The benchmark 10-year U.S. Treasury note rose
6/32 in price and yielded 2.36 percent, down from 2.38 percent
late on Monday, while the 30-year bond added 19/32
in price to yield 3.45 percent, down from 3.48 percent at
Monday's close.	
    The 10-year note's yield touched a 4 1/2-month high of 2.399
percent on Tuesday during a bout of selling. The five-year note
was last trading unchanged in price and yielding 1.20 percent, 
but it, too, hit a yield high earlier on Tuesday. The five-year
yield touched 1.23 percent, the highest in over seven months.	
    "People are just not sure where the yields are going to
settle," said Boris Rjavinski, U.S. rates derivatives strategist
at UBS Securities in Stamford, Connecticut. "For people to go in
and really start buying Treasuries right now would be like
catching a falling knife."	
    Still, yields remain near historic lows. The 10-year yield
of 1.67 percent in September 2011 was the lowest in at least 60
years.	
    "It would be natural to assume that since a bottom in bonds
has been established, the smart thing to do would be to call for
a rapid 2009-style backup in long-term rates," said Steven
Ricchiuto, chief economist at Mizuho Securities in New York.	
    "Although such an outcome cannot be ruled out, it is not our
central call. Instead, our new market call is for the 10-year
note to establish a new 2 percent to 2.5 percent trading range
and to hold this range through at least the summer," he said.	
    "We find it hard to fight the Fed," Ricchiuto said,
referring in part to the central bank's latest stimulus program,
nicknamed "Operation Twist".	
    On Tuesday, the Fed bought $1.969 billion of Treasuries
maturing February 2036 through February 2042 as part of
Operation Twist.	
    There was some evidence that the recent rise in yields may
have run its course.	
    The share of investors who said on Monday they are long, or
owning more Treasuries than their portfolio benchmarks, rose to
25 percent from 21 percent the previous week, matching the level
seen two weeks ago, J.P. Morgan Securities' latest weekly
Treasury client survey showed.	
    Following last week's sharp market sell-off, the share of
investors who said they are short U.S. government debt, or
holding fewer Treasuries than their benchmarks, fell to 15
percent, down from 23 percent the previous week. 	
    "The Treasury market appears to be in the early stages of
tracing out a new higher range. There are no signs yet that this
is the beginning of a sustained bear move," William O'Donnell
and John Briggs, strategists at RBS Securities in Stamford,
Connecticut, said in a research note.

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