TREASURIES-U.S. bond prices rise as higher yields lure buyers
* U.S. $24 billion 10-year note auction drew strong demand
* Treasury to sell $16 billion 30-year bonds Thursday
* Fed bought $1.51 billion long-dated Treasuries
* Fed's Pianalto says prepared for QE retreat if job market improves
NEW YORK, Aug 7 (Reuters) - U.S. government debt prices rose on Wednesday as higher yields attracted buyers to the Treasury's 10-year note auction, the second of three Treasury coupon sales this week. "A juicier, higher coupon and the second highest yield at auction since mid-2011 brought in strong demand for 10-year notes today, as shown by the high indirect bid and low dealer take even as the auction came into a small rally," said John Briggs, managing director and U.S. rate strategist at RBS in Stamford, Connecticut. Briggs said the result was "a decent sign" for the market, "which is attempting to stabilize in this newer, higher rate range as we creep towards September and the Fed's expected tapering (of its quantitative easing-related bond purchases)." Briggs said the decent demand could bode well for the Treasury's final coupon sale of the week - an auction of 30-year bonds set for 1 p.m. EDT (1700 GMT) on Thursday. From early May, when the Federal Reserve indicated it planned to reduce the size of its bond buying program, benchmark 10-year yields have risen from about 1.60 percent to about 2.60 percent. The latter yield reflects the view that the Fed is ready to start trimming its bond purchases in September or October. In late trade, the U.S. benchmark 10-year Treasury note was up 13/32, its yield easing to 2.60 percent from 2.64 percent late on Tuesday. Robert Tipp, chief investment strategist at Prudential Fixed Income, with $400 billion in fixed-income assets under management, in Newark, New Jersey, said the Treasury market "has overreacted, pricing in a picture perfect exit by the Fed. "There's been a mini panic by retail investors and long rates are starting to crest here," he said. "The yield curve is priced for a return to normalcy five years out and that's too aggressive." That move occurred because investors went from being "overly complacent that the Fed would be on hold for as far as the eye could see to a mode of mini-stampede where municipal bonds, high-yield bonds, emerging market bonds, and Treasury Inflation Protected Securities (TIPS) came under selling pressure from retail investors who woke up to the notion that we're four years into an economic recovery and the Fed is not going to be in an emergency degree of accommodation forever," Tipp said. Once investors "woke up" to that notion, they overreacted and "hit that sell button with both hands," Tipp said. Now that yields have risen sharply and prices are down, Treasuries and other kinds of bonds look more attractive. "The economic recovery is modest, inflation is muted, and the Fed plans to keep short-term interest rates near zero into 2015," Tipp observed. Meanwhile, a demographic demand exists for money in bank deposits and money market funds to earn yield, both for retail investors and for pension funds, he said. Another reason for investors to buy Treasuries near these levels is that "even after the Fed stops tapering, they will - hands down - be running an easier monetary policy than they've ever run before," Tipp said. As to the 30-year bonds scheduled for sale on Thursday, some participants were optimistic that those, too, would find buyers. "Supply has been the biggest catalyst of the week. There may be some value at the long-end of the curve," said Mike Lorizio, head of Treasuries trading at Manulife Asset Management in Boston. The U.S. Treasury will use most of the proceeds from this week's debt sales to repay investors who hold maturing government securities. The federal government will only receive $2.4 billion in new cash from the debt sold. Another factor supporting bond prices was the Bank of England's commitment to keep its policy rates low, with the goal to knock domestic unemployment under 7 percent, which is comparable to the rhetoric coming from its U.S. counterpart.
"In general, this is positive for the bond market because it keeps rates in check," said Mike Cullinane, head of Treasuries trading with Raymond James in St. Petersburg, Florida. Fed Chairman Ben Bernanke and other top central bank officials have said in recent weeks the timing of any reduction in bond purchases is not set in stone, adding the Fed will likely keep short-term interest rates near zero for a protracted period even after it stops buying bonds. This, in turn, has halted a bond market selloff that lifted benchmark yields to 2.755 percent, a 23-month high, in early July. Cleveland Fed President Sandra Pianalto, who is not a voter on the Fed policy committee this year, said on Wednesday the Fed could soon begin reducing the pace of its bond-buying stimulus if recent improvement in the U.S. job market persists.
The 30-year bond was up 28/32 in price, its yield easing to 3.68 percent from 3.73 percent late on Tuesday. The Fed conducted its second purchase of long-dated Treasuries this week. It bought $1.507 billion in bonds maturing in February 2036 through February 2043 after it bought $1.496 billon of these maturities on Monday. In other parts of the bond market, the yield spreads between the debt issued by U.S. mortgage finance agencies Fannie Mae and Freddie Mac were mostly little changed after Freddie posted its second largest ever quarterly profit.
The yield premium on a Freddie five-year note issue due March 2018 over comparable five-year Treasuries was about 8 basis points, up slightly from late Tuesday, according to Reuters data.