TREASURIES-U.S. bond prices rise before Fed meeting next week

Karen Brettell and Richard Leong
Friday, 25 Oct 2013 | 3:04 PM ET

* U.S. Fed seen unlikely to taper before 2014

* Consumer, durables data hint slowing U.S. growth

* Treasury to sell $96 bln 2-, 5-, 7-year debt next week

* No reaction to report on Yellen's Fed nomination

NEW YORK, Oct 25 (Reuters) - U.S. Treasury debt prices rose on Friday with benchmark yields hovering near three-month lows, as investors shifted their focus to the Federal Reserve meeting next week, where it might signal it will stick to the current size of its bond-purchase stimulus. The bond market has traded in a tight range since Tuesday when yields fell on data that showed employers hired fewer workers than expected in September, stoking fears the economy was slowing even before the government's 16-day shutdown that ended last week. The 10-year note yield was on track to fall for a second straight week, though it has struggled to decline much below the chart resistance of 2.50 percent. "We are moving sideways. The market is expecting Fed's bond purchases will continue into 2014. There's nothing in the near term that will change this view," said Brian Rehling, chief fixed income strategist at Wells Fargo Advisors in St. Louis. The government is catching up on issuing a backlog of data, which have largely supported the notion the U.S. central bank needs to stick to its current level of bond-purchase stimulus, or QE3, to support an economic recovery that has slowed since late summer. Economists expect Fed policymakers will decide to maintain their $85 billion monthly purchases of Treasuries and mortgage-backed securities when they meet next Tuesday and Wednesday. They projected the Fed would keep this pace of buying until March. "The market continues to do better here in an environment where the Fed is not tapering quantitative easing until sometime in 2014," said Gary Pollack, head of fixed income trading at Deutsche Bank Private Wealth Management in New York. Benchmark 10-year notes were last up 4/32 in price to yield 2.507 percent, down 1 basis points from late on Thursday and 8 basis points from a week earlier. The 10-year yield has fallen from 3 percent on Sept. 5, about two weeks before the Fed surprised investors by leaving its bond purchase program unchanged. The effects of the government shutdown and wrangling over raising the debt ceiling are expected to linger for several months, muddying insight into the economy. "The economy looks a little disappointing and we're not going to get a clear picture of what the economy is doing until we get figures for the month of December, which come out in January," Pollack said. New orders for long-lasting U.S. manufactured goods outside of transportation equipment fell in September in a possible sign companies were holding back investments due to uncertainty over government spending. U.S. consumer sentiment dropped in October to its lowest level since the end of last year as consumers worried that congressional dysfunction and the partial government shutdown would hurt growth, a survey showed on Friday.

YELLEN'S NOMINATION After the rally that has sent 10-year yields down by half a percentage point in two months, further yield declines will depend on data or on new signs from the Fed that it is taking a more cautious stance on the economy. "In order for us to rally and extend the range to lower yields you either need something even more dovish coming out of the Fed next Wednesday, or you need to have a significant weakening in the economic data, which we haven't seen," said Richard Gilhooly, an interest rate strategist at TD Securities in New York. The perception the Fed will continue with its current level of stimulus has been stoked by the White House's decision to nominate Fed Vice Chair Janet Yellen to succeed Ben Bernanke to head the central bank. Yellen has expressed views similar to Bernanke's and is seen as an architect behind the Fed's quantitative easing programs. The White House said on Friday its paperwork for Yellen's nomination was submitted to the Senate following a report from CNBC television which cited a source close to Senator Rand Paul reported the Kentucky Republican plans to put a "hold" on her nomination. The CNBC report on Paul's possible move was shrugged off by investors. Some of them have attributed the recent decline in bond yields to likelihood Yellen will head the Fed next year. In addition to watching to what the Fed will signal next week, traders will contend with new Treasuries supply. The Treasury Department will sell $96 billion in new coupon-bearing supply next week, including $32 billion in two-year notes on Monday, $35 billion in five-year notes on Tuesday and $29 billion in seven-year notes on Wednesday.