TREASURIES-U.S. bond prices rise on bets Fed keeping rates low
* U.S. industrial output in May falls short of forecast
* Foreign investors reduce Treasuries holdings in April
* Fed to buy $1.25 billion to $1.75 billion in Treasuries
NEW YORK, June 14 (Reuters) - U.S. government debt prices rose on Friday as traders bought bonds on the view the Federal Reserve would stick to its near-zero interest rate policy for a protracted period to help the economy even if it were to reduce its bond purchases this year. That view emerged after The Wall Street Journal published a story late Thursday saying an adjustment in the Fed's bond-buying program did not mean that the U.S. central bank would end the purchases "all at once" or that the Fed was "anywhere near raising short-term interest rates." The article allayed the market's worst fears the U.S. central bank was preparing for a quick exit from the quantitative easing policy it adopted more than four years ago. The Fed has been buying bonds with the goal of lowering long-term interest rates. Those worries grew out of comments from Fed Chairman Ben Bernanke at a testimony before a congressional panel on May 22, where he said a decision on whether to reduce its current $85 billion monthly bond purchases could come at one of the central bank's "next few meetings" if the economy proves it's on a steady growth path. Fed policy-makers, who will meet Tuesday and Wednesday, might offer more clues about their collective view on the current third round of bond purchases, known as QE3. "That (Wall Street Journal) article put things back into perspective. Next week, the market is looking for clues about possible timing on a tapering," said Sean Simko, head of fixed income management at SEI Investments Co. in Oaks, Pennsylvania. Less anxiety about the Fed raising short-term rates, together with on balance weaker-than-expected data on industrial output and consumer sentiment, spurred buying in Treasuries, sending benchmark yields to their lowest levels in a week. In morning trading, the 10-year Treasury notes were 10/32 higher in price with a yield of 2.113 percent, down 3.6 basis points from late on Thursday. The 30-year bond rose 10/32 to yield 3.296 percent, 1.9 basis points lower than Thursday's close. Treasury yields rose to 14-month highs earlier this week on fears about the Fed buying fewer bonds. The bond market stabilized from its recent sell-off as data showed the U.S. economy, while growing, has been unable to gain traction due to high unemployment. Federal budget cuts and expiration of a payroll tax holiday have added to the drag on growth this year. Data on Friday showed industrial output was unchanged in May, falling short of the 0.2 percent rise forecast by economists, while the U.S. producer price index grew 0.5 percent last month, more than the 0.1 percent gain projected by analysts. "The Fed is trying to lay down a road map, but the market has over-reacted," Simko said.
Separately, at 11 a.m. (1500 GMT), the Fed bought $1.46 billion in Treasuries whose maturities range from February 2036 through May 2043.