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TREASURIES-Prices near flat as investors ponder Fed's course
May 30, 2013 / 6:53 PM / 4 years ago

TREASURIES-Prices near flat as investors ponder Fed's course

* Treasury sells $29 billion of seven-year debt
    * High yield in auction comes in below market expectations
    * Weakness in inflation-linked debt seen problematic for Fed
    * Fed buys $1.53 billion of bonds due 2036-2043

    By Luciana Lopez and Karen Brettell
    NEW YORK, May 30 (Reuters) - U.S. Treasuries traded nearly
unchanged on Thursday as investors waited for clues about the
strength of the economy and future moves by the U.S. Federal
Reserve, which has hinted recently it could soon slow its
massive monetary easing program.
    Prices briefly edged higher after a sale of $29 billion in
7-year debt fetched a lower yield than markets had expected,
with solid demand for a second auction in a row this week. A
five-year note auction on Wednesday was met with strong demand,
although a two-year note auction on Tuesday did not fare as
well.
    But the price gains proved ephemeral, as investors were
reluctant to change positions as uncertainties remain about the
Fed's future course of action.
    "Investors are in a wait and see mode, just like the Fed,"
said Millan Mulraine, director of U.S. research and strategy at
TD Securities in New York.
    "If you're an investor with a position in Treasuries right
now, you essentially want to sit on your hands in the next few
days," he added.
    The strength of the world's biggest economy is the key
question for Treasuries investors now: Is it strong enough for
the Fed to slow or even stop buying $85 billion per month in
Treasuries and mortgage-backed securities? Or is the central
bank's support still crucial in the face of fiscal headwinds?
    Markets have been especially sensitive to these questions
after Fed Chairman Ben Bernanke said last week the 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.
    The resultant dramatic surge in Treasuries yields this month
is leaving many investors struggling to figure out whether the
rise will continue or if the market is oversold. Data next week
showing 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 up 2/32 in
price to yield 2.114 percent, compared to 2.119 percent late on
Wednesday.
    The yields have jumped from 1.61 percent at the beginning of
May to reach 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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