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TREASURIES-US Treasuries drop as Fed's outlook curbs safety bid
March 14, 2012 / 8:48 PM / 6 years ago

TREASURIES-US Treasuries drop 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 met with average demand

    By Chris Reese	
    NEW YORK, March 14 (Reuters) - U.S. Treasuries prices
plunged on Wednesday, sending yields to the highest
level since October as the Federal Reserve's brighter economic
outlook and recent stock market strength drove investors out of
U.S. government debt for a second day.	
    The surge in yields raised questions about the possible end
to a long, steady Treasuries rally that has been driven by the
euro zone debt crisis and a U.S. economy that has struggled with
historically high unemployment. 	
    Mostly positive stress test results for the U.S. banking
sector, announced by the Fed late Tuesday afternoon, also
undermined the Treasury market's safe-haven appeal.	
    Treasuries extended losses following the auction of $13
billion of reopened 30-year bonds. The sale was met with about
average demand, although many market players had been looking
for a stronger appetite for the debt.	
    Yields rose above some technical milestones, with the
five-year through 30-year yields passing their 200-day moving
averages, which could signal further selling may be in store.	
    A 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 
on Wednesday traded down 2-23/32 in price to yield 3.42 percent,
up from 3.27 percent late Wednesday.	
    The benchmark 10-year Treasury note traded
1-13/32 lower in price to yield 2.28 percent, the highest since
October 31 and up from 2.13 percent late Tuesday. Yields had the
biggest two-day rise since October, putting some room between
the 1.67 percent mark reached in September, which was the lowest
in at least 60 years.	
    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 New York.	
    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.	
    However, with the Fed expected to hold interest rates near
zero for the immediate future, some analysts did not see a lot
of room for yields to zoom much higher.	
    "We expect short-term real interest rates in the U.S. to
remain close to zero, at least for the next year or so," said
Julian Jessop, chief global economist at Capital Economics in
London, adding "this, in turn, is likely to keep long-term real
yields firmly anchored."	
    "U.S. Treasury yields will rise sharply at some point once
the markets start to expect monetary policy to return to more
normal settings, but that point is probably still a long way
off," Jessop said. 	
    The reopened 30-year bonds auction on Wednesday brought a
high yield of 3.383 percent, which was the highest since August.
Sales of $21 billion of reopened 10-year notes on Tuesday and
$32 billion of three-year notes on Monday also brought near
average demand.

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