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TREASURIES-US Treasuries plunge as Fed's outlook curbs safety bid
March 14, 2012 / 6:08 PM / in 6 years

TREASURIES-US Treasuries plunge as Fed's outlook curbs safety bid

* Fed's brighter outlook for US economy hits prices
    * Good results on bank stress tests weaken safety bid
    * 30-year bond auction has near average demand

    By Ellen Freilich	
    NEW YORK, March 14 (Reuters) - U.S. Treasuries prices
plunged on Wednesday, sending yields to the highest
since October, as the Federal Reserve's brighter economic
outlook and ongoing stock market strength drove an exit from
safe-haven U.S. government debt for a second day.	
    Mostly positive stress test results for the U.S. banking
sector, announced by the Fed late Tuesday afternoon, also gave
investors confidence to seek higher returns in riskier assets. 	
    An unexpected degree of optimism in the Fed's policy
statement on Tuesday pushed the long end of the
Treasury curve through support at 3.25 percent. The 30-year
Treasury bond was trading 2-24/32 lower in price to
yield 3.41 percent, up from 3.27 percent late Wednesday.	
    The benchmark 10-year Treasury note was trading
1-10/32 lower in price to yield 2.28 percent, the highest since
October 31 and up from 2.13 percent late Tuesday.	
    Treasury rates have risen on better economic data and
improved sentiment, along with the mostly positive results from
stress tests of the banking sector, said Tom Chow, senior vice
president and portfolio manager at Philadelphia-based Delaware
Investments, with $150 billion in assets under management. 	
    Simultaneously, "there's still abundant cash to be put to
work in risk sectors and additional proceeds may come from
redeployment from 'risk-free' sectors like Treasuries," he said.	
     The Fed said that 15 of the 19 banks it tested would have
enough capital to protect against losses, even in the event of a
severe financial shock. The stress tests give a window into the
health of the U.S. banking industry. [ID:nL2E8EDK4 ] 	
    On Wall Street, stocks were mostly flat, taking a breather
after a five-day advance.	
    "Equities are getting the message that they are cheap
relative to bonds, which is the other side of bonds getting the
message that they are extremely expensive," said Alan Ruskin,
head of G10 currency strategy at Deutsche Bank in New York.	
    Some even argued the Fed could raise interest rates next
year, although the Fed has continued to say it would keep its
federal funds rate exceptionally low at least through late 2014.	
    "Our guess is the economy continues to do well and (the Fed
will) raise rates sometime early in 2013," said Chris Rupkey,
managing director and chief financial economist at Bank of
Tokyo-Mitsubishi UFJ in a note.	
    Against such a backdrop, the market's reaction to the Fed
"makes sense," said Jonathan Lewis, chief investment officer at
Samson Capital Advisors in New York.	
    "We're seeing a bear steepener where shorter maturities are
holding in much better than longer ones, because the Fed
reiterated that the short end of the curve is safe to be in," he
said, referring to the Fed's pledge on ultra-low rates.	
    In contrast, inflation and growth expectations could drive
the long end of the curve, Lewis said.	
    The Fed's observation that the economy has been expanding
and that labor market conditions have improved "reinforced the
model for the bond market that better data means good equity
market performance; when risk assets like equities perform well,
it's a bear steepener, so sell the long end," he said.	
    Despite the selloff, an auction of $13 billion in reopened
30-year bonds on Wednesday was met with near-average
demand, as were auctions of $21 billion of reopened 10-year
notes on Tuesday and $32 billion of three-year notes on Monday.

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