* Traders see Fed sticking to gradual pace of rate hikes
* 3-, 5-year yields hit more than five-week lows
* Yields initially rise on Fed balance sheet discussion
(Updates prices, adds comments)
By Sam Forgione
NEW YORK, April 5 U.S. Treasury yields fell on
Wednesday, with three- and five-year yields touching more than
five-week lows after traders viewed the latest Federal Reserve
meeting minutes as indicating the central bank was maintaining
an outlook for a gradual pace of interest rate increases.
Yields initially shot higher after the Fed minutes, which
also showed most of the central bank's policymakers think it
should take steps to begin trimming its $4.5 trillion balance
sheet later this year as long as the economic data holds up.
Longer-dated yields in particular surged on that view within
the central bank, since halting or phasing out reinvestments
would remove a considerable source of demand for longer-dated
Treasuries, analysts said.
The Fed bought Treasury and mortgage-backed bonds on an
unprecedented scale in the wake of the financial crisis to help
keep interest rates low to spur hiring and growth.
Both longer- and shorter-dated yields reversed course,
however, in what analysts said was a realization among traders
that the Fed was maintaining its "dovish" pace of rate
increases. Shorter-dated yields are considered most vulnerable
to Fed rate hikes.
Yields on Treasuries maturing in three and five
years fell the most on the day and hit their lowest
levels since Feb. 27 of 1.426 percent and 1.837 percent
"The market is anticipating a more hawkish stance than they
actually get," said Lou Brien, a market strategist at DRW
Trading in Chicago. He said the Fed's reinforcement of its
gradual pace of rate hikes likely disappointed those
expectations and led yields lower.
Policymakers appeared to see upside risks to the economy,
but there was still disagreement on how close the Fed was to
meeting its 2 percent inflation goal this year.
Despite reversing their initial rise, longer-dated yields
still fell less than shorter-dated yields given the discussion
of balance sheet tapering, analysts said.
The details of the discussion "put the market on notice that
(the Fed's) buying is not going to go on forever," said Collin
Martin, director of fixed income at the Schwab Center for
Financial Research in New York. "There are going to be some
other buyers that will need to step in there and make those
Benchmark 10-year Treasuries were last up 4/32 in price to
yield 2.334 percent, from a yield of 2.350 percent late Tuesday,
while 30-year yields were down 1 basis point at 2.981 percent.
Wednesday, April 5 at 1603 EDT (2003 GMT):
US T BONDS JUN7 151-31/32 0-10/32
10YR TNotes JUN7 125-60/256 0-52/256
Price Current Net
Three-month bills 0.79 0.8026 0.000
Six-month bills 0.9025 0.9192 0.000
Two-year note 100-10/256 1.23 -0.020
Three-year note 100-140/256 1.4343 -0.028
Five-year note 100-32/256 1.8486 -0.029
Seven-year note 99-236/256 2.1371 -0.024
10-year note 99-72/256 2.3319 -0.018
30-year bond 100-100/256 2.98 -0.012
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 33.25 -0.75
U.S. 3-year dollar swap 28.75 -1.00
U.S. 5-year dollar swap 11.00 -0.50
U.S. 10-year dollar swap -2.75 -1.00
U.S. 30-year dollar swap -39.75 -1.00
(Reporting by Sam Forgione; Editing by Lisa Von Ahn and Chris