TREASURIES-U.S. bonds fall on corporate supply before Fed talks
* Treasuries selling tied to hedging on corporate bond deals
* Traders await clues on tapering timeline from Fed meeting
* July U.S. jobs report seen paramount among this week's data
* Treasury refunding details might include selling fewer bonds
NEW YORK, July 29 (Reuters) - U.S. Treasuries prices fell on Monday on selling by Wall Street dealers to lock in borrowing costs for corporate bonds they are underwriting ahead of this week's Federal Reserve policy meeting and U.S. employment report. Bets the U.S. government might pare its sales of short-term debt also exerted pressure on bonds, although benchmark yields remained about 17 basis points below their 23-month high of 2.755 percent set this month, analysts said. "There were some rate-locking activities. It started with the corporate issuance announcements," said Chuck Retzky, director of futures sales at Mizuho Securities USA in Chicago. U.S. companies are poised to sell $15 billion to $20 billion in investment-grade bonds this week with most deals to be done before the Fed's policy announcement on Wednesday and U.S. jobs data on Friday, said IFR, a unit of Thomson Reuters. As a part of underwriting, a dealer sells Treasuries as a hedge to lock in the borrowing cost on the bond issue before the deal is completed. Once the bond is sold, the dealer buys Treasuries to exit the "rate lock." Typically, market moves stemming from supply hedging are temporary and not indicative of market sentiment. Investors are waiting to see whether the Fed is on track to reduce its bond-purchase stimulus later this year as the economy has shown signs of growth despite naggingly high unemployment. Fed Chairman Ben Bernanke signaled in recent congressional testimony the U.S. central bank might consider buying fewer bonds. The possibility the Fed might scale back its third bout of 'quantitative easing' roiled financial markets worldwide, with Treasuries suffering their worst quarter in 2-1/2 years. Since then, Bernanke and many top officials have sought to calm jittery investors that any reduction in purchases in Treasuries and mortgage-backed securities, currently running at $85 billion a month, is not set in stone. Moreover, they said the Fed will likely keep short-term rates near zero for a long time even after it stops buying bonds. "The Fed meeting is the most important event this week. It has to do with expectations about some clarification from the Fed about tapering of bond purchases," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. Currently, a number of Wall Street economists forecast the Fed will begin to trim its bond purchases at its September policy meeting, the next one after this week's two-day meeting. "To tip the scales to September, the Fed would need to see a pretty strong employment report this Friday," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas City, Missouri. Other economic releases traders will watch closely include the Conference Board's consumer confidence report and S&P/Case-Shiller home price data on Tuesday, ADP's private-sector employment report and the government's first estimate of second-quarter gross domestic product growth on Wednesday and the Institute for Supply Management's manufacturing indexes on Thursday. Benchmark 10-year Treasury notes fell 6/32 in price with their yield rising to 2.587 percent, up 2.3 basis points from late on Friday.
AUGUST REFUNDING In addition to the Fed and a heavy spate of data, the Treasury's quarterly refunding announcement on Wednesday will be a focus for traders and investors. Some analysts expect the Treasury to cut coupon-bearing debt sales for the first time since September 2010 as a falling deficit reduces funding needs. Any cuts are seen likely to start in the shortest maturities before moving to longer-dated debt. Less short-term debt supply should support prices and keep a lid on borrowing costs for the federal government whose deficit, while on track to shrink this year, remains elevated from its level before the 2007-2009 recession, analysts said. In anticipation of relatively more longer-dated Treasuries than shorter-dated debt, some traders trimmed their longer-dated debt on Monday. "If there is any cut in the front end, it will help steepen the yield curve due to relatively more supply at the long end," R.W. Pressprich's Milstein said. The yield curve - the yield differential between short- and long-dated Treasuries - steepened, with the spread between two-and 10-year note yields growing to 2.27 percentage points, the widest in about 2-1/2 weeks. The Treasury Department will release its quarterly refunding details on Wednesday at 8:30 a.m. (1230 GMT).