February 16, 2017 / 8:02 PM / a year ago

TREASURIES-Prices gain as equities dip, Fed's Dudley seen dovish

(Recasts with equity drop, Fed speaker, adds quotes, updates
    * Weaker stocks boost demand for bonds
    * March Fed hike odds drop after Dudley comments

    By Karen Brettell
    NEW YORK, Feb 16 (Reuters) - U.S. Treasury prices gained on
Thursday as weaker stock markets and a falling U.S. dollar
increased demand for safe haven bonds, and after comments from a
senior Federal Reserve official late on Wednesday were viewed as
relatively dovish.
    U.S. stock markets were weighed down by energy stocks as oil
prices dropped and as banks shares fell for the first time in
six days. 
    "We're responding a little bit to the weakness in equities,"
said Michael Cloherty, head of U.S. rates strategy at RBC
Capital Markets in New York.
    Comments from New York Fed President William Dudley late on
Wednesday were also seen as more dovish than recent commentary
from Fed Chair Janet Yellen.
    The Fed aims to raise rates in the months ahead as long as
the economy continues to grow a bit above its trend and if, as
expected, fiscal policies provide a boost, Dudley said.
    Traders are now pricing in a 18 percent chance the U.S.
central bank will raise rates at its March meeting, down from 31
percent on Wednesday, according to the CME Group's FedWatch
    Benchmark 10-year notes were last up 17/32 in
price to yield 2.44 percent, down from 2.50 percent late on
    Bond yields jumped after Yellen took a more
hawkish-than-expected tone in testimony to lawmakers on Tuesday,
indicating that further rate hikes are likely in the coming
    A jump in consumer price inflation and retail sales data on
Wednesday added to this sentiment, while a Philadelphia
manufacturing index on Thursday jumped to a 33-year high.
    "The last couple of days have been pricing in a more
aggressive Fed with the one-two punch of the high CPI and retail
sales, and along with Yellen's testimony," said Cloherty.
    The recent backup in yields, however, helped draw buyers
back to the market on Thursday.
    "It seems like there is an underlying bid in that 2.50
(percent) area in 10-year notes," said Dan Mulholland, head of
Treasuries trading at Credit Agricole in New York.
    Treasuries have held within their recent range even as
investors prepare for the potential for three rate hikes this
year, with 10-year notes trading between 2.31 percent and 2.52
percent since the beginning of the year.
    "The market's been very resilient," said Mulholland.
    The Treasury Department sold $7 billion in 30-year Treasury
Inflation-Protected Securities (TIPS) on Thursday to moderate
demand at a high yield of 0.923 percent. 

 (Editing by Bernadette Baum and Lisa Shumaker)
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