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US bond prices rise as investors await Fed tapering decision

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U.S. Treasury debt prices rose on Tuesday as investors awaited a decision from the Federal Reserve on a possible reduction of its bond-purchase stimulus and clues on how it might manage short-term interest rates.

The Federal Open Market Committee, the U.S. central bank's policy-setting group, is widely expected to pare its $85 billion monthly purchases of Treasurys and mortgage-backed securities at its two-day meeting, set to start Tuesday.

The U.S. labor market, while improving, remains fragile and job growth has been running below the pace seen in prior economic recoveries. This might cause the FOMC to begin tapering by a modest amount, analysts said.

"The jobs market continues to grow, but at a pace that is less than ideal. Nonetheless, all indications are that the Fed is poised to announce tomorrow that they will begin to pare back their bond purchases," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

Government data showing inflation in check also supported bids for longer-dated issues. Rising prices erode bond values in the long run.

Moreover, bets that the Fed might delay tapering until later this year helped lift bond prices, analysts said.

"The risk is skewed on a dovish outcome," said Anthony Valeri, fixed income strategist at LPL Financial in San Diego. "There's a chance they (the Fed) might not do anything at all. That'll be positive for the bond market."

However, gains on Wall Street stocks and weaker German Bund prices kept a lid on bids for Treasuries, analysts said. Benchmark 10-year Treasury notes were 4/32 higher in price with a yield of 2.853 percent, while two-year notes held steady in price, yielding 0.379 percent. The 30-year bond was up 19/32 in price with a yield of 3.837 percent, down from late Monday.

Treasury yields hovered near their lowest levels so far in September after falling on Monday in the wake of news that Lawrence Summers, a former Treasury secretary and former top economic aide to President Barack Obama, withdrew from consideration as Federal Reserve chairman.

The news of the end of Summers' quest to lead the Fed on Sunday eased fears of more aggressive Fed policy tightening if he were in charge of overseeing the monetary policy of the world's biggest economy. With Summers out of the running, traders raised expectations that current Fed vice chair Janet Yellen would be Obama's nominee for the central bank's top job. Wall Street seems more comfortable with Yellen as the next Fed chair because she is expected to take a gradual approach to reduce stimulus and to rise interest rates, analysts said.

Given this view about a fairly smooth transition in Fed leadership, bond investors stepped back into longer-dated Treasurys in the latest week. In a poll of its Treasurys clients released on Tuesday, J.P. Morgan Securities said 21 percent of those surveyed on Monday said they held more longer-dated government debt versus their portfolio benchmarks, compared with 15 percent a week ago.

Data showed foreign appetite for Treasurys returned in July after overseas investors dumped them in June during a dramatic bond market sell-off on worries about the Fed paring back its bond purchases later this year.

But the longer-term state of the United States' finances remains questionable. The Congressional Budget Office said the federal deficit would grow to 6.4 percent of the domestic economy in 2038, versus 3.9 percent this year, due to rising costs for government programs for retirement and medical care.

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