TREASURIES-U.S. bond market rallies before 30-year auction
* Upbeat U.S. data briefly limits bond gains
* Thirty-year supply may fetch highest yield in 15 months
* Fed buys $3.29 bln in Treasuries due in 2020 to 2023
* TIPS swoon; 10-year breakeven rate slips near 2 percent
NEW YORK, June 13 (Reuters) - U.S. Treasury debt prices rose on Thursday ahead of an auction later on Thursday of 30-year bonds, although gains were limited by encouraging U.S. data that supported the view the Federal Reserve might start to pare its bond purchases. Renewed appetite for Treasuries will likely bolster bidding at the $13 billion auction of 30-year bonds at 1 p.m. (1700 GMT), part of this week's $66 billion in coupon-bearing government debt supply, analysts said. Investors scooped up Treasuries, Japanese yen, and other perceived low-risk investments as they unloaded stocks, risky bonds and other growth-oriented assets on jitters about how soon the Fed might dial back its bond purchase program, worth $85 billion a month, known as Quantitative Easing 3, or QE3. The Bank of Japan refrained earlier this week from embarking on further stimulus, which added to trader anxiety about the willingness of central banks to aid their economies. "A lot of the Fed tapering talk has been priced in. The market was oversold. Now you have the Japan fears," said Ellis Phifer, senior market analyst at Raymond James in Memphis, Tennessee. Overnight, Tokyo's Nikkei stock index fell more than 6 percent to a 10-week low and has lost nearly 22 percent since a multi-year high on May 23 to enter bear market territory. The yen rose as much as 2 percent against the dollar to its strongest level since the Bank of Japan surprised markets with its aggressive $1.4 trillion stimulus program on April 4.
Wall Street stocks were in positive territory in midday trading after opening lower, with the Standard & Poor's 500 index gaining 0.43 percent. The rebound in U.S. stocks did not pressure bond prices. Benchmark 10-year Treasury notes were up 12/32 in price, yielding 2.185 percent, down 4.3 basis points from late on Wednesday. The 10-year yield touched a 14-month high of 2.293 percent two days ago. "The relationships across markets have broken down a bit but they seem to revolve around the reversal of the yen," said Brian Rehling, chief fixed-income strategist at Wells Fargo Advisors in St. Louis, Missouri. Treasuries prices briefly retreated from their initial highs after a steeper-than-expected drop in weekly jobless claims and surprisingly strong increase in May retail sales. The reports supported the view the U.S. central bank might trim its bond purchases as early as September. "These data were strong and confirmed the Fed has the leeway to signal it's ready to pull out," said Robbert Van Batenburg, director of market strategy at Newedge USA LLC in New York. Within the U.S. government debt sector, Treasury Inflation-Protected Securities were on track for another beating as bets on weak inflation and reduced Fed purchases have hammered the sector, sending the 10-year TIPS yield into positive territory for the first time since January 2012 earlier this week. "They have been a double-whammy for TIPS," Wells Fargo's Rehling said about the soft inflation outlook and the spike in bond yields. "TIPS have been awful performers." TIPS have lost 5.79 percent year-to-date, according to the TIPS total return index compiled by Barclays. The yield gap on 10-year TIPS and 10-year regular Treasuries, which the Fed monitors as a gauge of investors' inflation expectations, narrowed further on Thursday to 2.03 percent. The 10-year inflation "breakeven" rate has not been below 2 percent since late December 2011.
30-YEAR BOND SALE This week's auction results have been mixed as some investors stayed on the sidelines and were not enticed by Treasury yields at their highest level in more than a year. They remained nervous on whether Fed policymakers might scale back $45 billion monthly purchases of Treasuries and $40 billion in mortgage-backed securities, even though domestic unemployment has not fallen as quickly as they would like and core inflation has been below the Fed's 2 percent target. The bid-to-cover ratios, which measure the amount of bids submitted to the amount of debt offered were weak at two debt auctions This gauge of buying interest at Tuesday's $32 billion three-year note sale came in at its lowest level in 2-1/2 years, while the bid-to-cover at Wednesday's $21 billion 10-year debt auction turned out to be its lowest in 10 months.
In the "when-issued" sector, traders expected the reopened 30-year bond issue due in May 2043 to sell at a yield of 3.334 percent, which was on track to be the highest yield at a 30-year auction since March 2012. The Treasury originally sold $16 billion worth of this bond issue at a yield of 2.980 percent in May. As the Treasury looked to complete this week's debt sales, the Fed bought $3.294 billion in government debt whose maturities range from August 2020 through February 2023.