TREASURIES-Prices fall as volatile quarter draws to close
* Payrolls figures key for start of next quarter
* Bond funds have seen huge outflows
* Fed officials continue to try to soothe markets
NEW YORK, June 28 (Reuters) - Prices for U.S. Treasuries slid in choppy trading on Friday, capping a week in which prices began to stabilize after yields shot to a near two-year high on a recent Fed-induced selloff. Portfolio adjustments for the end of the month and the quarter also added to volatility, analysts said. And that volatility could continue into coming sessions. "Markets remain choppy going into the payrolls report next Friday," said Justin Lederer, strategist at Cantor Fitzgerald in New York. "That could definitely set the tone for a date for QE," he added, referring to the timing for a potential pullback by the Fed from its bond-buying program, known as quantitative easing. "I wouldn't be surprised if we tried to touch the high yields again, but it's just dependent on data and what goes on around the world," Lederer said. The quarter proved a challenging one for Treasuries. The slump in prices started in May, gaining momentum when Fed head Ben Bernanke suggested that month that the bank could be looking for an exit for QE. But the exit became a stampede last week, when Bernanke said more strongly that the bank could begin slowing its $85-billion-per-month QE this year as the economy gains steam. However, Fed officials speaking this week have taken pains to reassure investors that the U.S. central bank will not halt all its stimulus measures at once, with policymakers not yet ready to hike interest rates for months or even years yet. The latest voice in the Fed chorus came on Friday from Governor Jeremy Stein, who said the bank must consider overall economic improvements since it launched the stimulus and not give undue weight to the most recent economic data.
A longer view is needed for the Fed's policy-setting committee to make a good judgment and to avoid undue market volatility, Stein said according to prepared remarks to the Council of Foreign Relations. Benchmark 10-year note yields have backed away from the 22-month high of 2.67 percent reached on Monday. On Friday, those notes traded down 11/32 in price to yield 2.514 percent, from 2.4758 percent late on Thursday. Even so, the yields remain significantly higher than the 2.20 percent area they traded at before Bernanke's comments last week, and above 1.60 percent at the beginning of May. Bond funds have struggled in recent weeks. Investors in funds based in the United States pulled $8.62 billion out of taxable bond funds in the latest week, marking the first four-week streak of outflows from the funds since 2008, data from Thomson Reuters' Lipper service showed on Thursday.
But some analysts said the Fed might find it harder to slow its purchases of Treasuries and mortgage-backed securities than markets realize. The Fed plans to pull back "only if the U.S. economy offers a combination of lower unemployment, faster growth and stable inflation," wrote HSBC Economists Stephen King and Madhur Jha in a report. "The Fed's own forecasts suggest this holy trinity may now be within reach. Our forecasts suggest otherwise." In this, analysts say, data will be key. The government's payrolls data for the month of June, due next Friday, comes one day after the U.S. Independence Day holiday, which may reduce volumes and make trading on the number more volatile.