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TREASURIES-Prices dip before supply, pare losses on jobless claims
May 30, 2013 / 3:27 PM / 4 years ago

TREASURIES-Prices dip before supply, pare losses on jobless claims

* Prices fall before $29 bln 7-yr note sale
    * Bonds pare earlier losses as jobless claims rise
    * Weakness in inflation-linked debt seen problematic for Fed
    * Fed buys $1.53 bln of bonds due 2036-2043

    By Karen Brettell
    NEW YORK, May 30 (Reuters) - U.S. Treasuries dipped on
Thursday before a new sale of seven-year notes, but pared most
of their earlier losses after data showed the number of
Americans filing new claims for unemployment benefits
unexpectedly rose last week.
    Investors are increasingly sensitive to economic data since
Federal Reserve Chairman Ben Bernanke said last week the U.S.
central bank may decide to taper its program of buying
Treasuries and mortgage-backed securities within the next few
Fed policy meetings if data shows the economy is gaining steam.
    Yields have surged this month on improving economic
sentiment and as investors sold bonds on concerns about losses
should the Fed pull back on its massive bond purchases.
    Data also showed that a drop in government spending dragged
more on the U.S. economy than initially thought in the first
three months of the year. 
    "We're very hyper-sensitive to the employment side of
things, though the GDP is an old number," said Tom Tucci, head
of Treasuries trading at CIBC in New York.
    The recent backup in rates may help the Treasury sell $29
billion in seven-year notes on Thursday, the final sale of $99
billion in new coupon-bearing debt this week. The government saw
strong demand on Wednesday for a $35 billion auction of
five-year notes.
    Some of that demand may ebb, however, if investors seeking
intermediate-dated debt bought yesterday's five-year notes at
the expense of today's seven-year offering.
    The dramatic surge in Treasuries yields this month is
leaving many investors struggling to know whether the rise will
continue, or if the market is oversold. Data next week that will
show how many jobs employers added in May is seen as the
catalyst for deciding the next large rate move.
    "We've reached an uneasy equilibrium in the market, where we
can easily see the prospect of much lower or much higher rates,"
said Aaron Kohli, an interest rate strategist at BNP Paribas in
New York.
    Benchmark 10-year notes were last down 3/32 in
price to yield 2.13 percent, after rising as high as 2.16
percent before the data.
    The yields have jumped from 1.61 percent at the beginning of
May, and reached a 13-month high of 2.24 percent in overnight
trading on Wednesday.
    A dramatic selloff in the inflation-linked bond market,
however, may complicate the Fed's objective of encouraging
borrowing in order to fund economic expansion.
    The so-called real yield, which is the amount a bond yields
after accounting for inflation, has been trading at negative
levels for the past few years, which has made it attractive for
companies and other borrowers to issue debt at very cheap
levels.
    "This is the Fed's lever for making the economy go," said
Kohli. After the recent selloff, however, "the market seems to
be placing no possibility at all on the prospect of inflation."
    Treasury Inflation-Protected Securities (TIPS) staged a
dramatic selloff on Wednesday even as Treasuries prices rose.
    Ten-year real yields are now trading at around negative 15
basis points, meaning a borrower would earn 15 basis points per
year from issuing debt, in from around negative 72 basis points
at the beginning of May.
    The release of April's Personal Consumption Expenditures
index on Friday, the Fed's favored inflation gauge, will be
closely watched for a further drop in price inflation. The index
has fallen to a 3-1/2-year low of 1.0 percent.
    The Fed bought $1.53 billion in debt due 2036 and 2043 on
Thursday as part of its bond purchase program.

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