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TREASURIES-Prices mixed as investors look to future Fed clues

Luciana Lopez
Wednesday, 6 Nov 2013 | 3:19 PM ET

* Focus on October U.S. payrolls due Friday

* Investors searching for clues about how Yellen could lead Fed

* Treasury to conduct $70 billion refunding next week

* Treasury to sell floating rate 2-year notes in 2014

NEW YORK, Nov 6 (Reuters) - Prices for U.S. Treasuries were mixed on Wednesday as investors looked for clues about future Federal Reserve policy moves ahead of a new incoming chairman and a gathering, but still fragile, recovery in the world's biggest economy.

With Fed Vice Chair Janet Yellen preparing to step into the shoes of current chairman Ben Bernanke early next year, the market has been searching for hints about how Yellen might enforce the central bank's dual mandate of controlling both inflation and unemployment.

Two economic papers this week added fuel to speculation that Yellen, while perceived as dovish, could nonetheless take a different tack than her predecessor.

The two papers, by Fed staff, suggest that the central bank under Yellen could see its available monetary policy tools in a different light than it does now, said Vishal Khanduja, a portfolio manager with Calvert Investments in Bethesda, Maryland. Calvert has approximately $12 billion in assets under management.

"The market is trying to digest whether the new Fed makeup and the new Fed thinking will be more prone to be keeping the short rates lower for longer and not depend so much on QE," he said.

The Federal Reserve is now weighing an exit from its quantitative easing program, under which the bank is buying $85 billion per month in Treasuries and mortgage-backed securities.

While many observers had bet it would start to scale back asset purchases in September, the central bank instead stayed the course, although a recent statement was more hawkish than expected.

Barclays economist Michael Gapen said the Fed's tapering of its asset purchases need not come at the same time as any potential change in how it uses its other policy tools.

"Policymakers may prefer to see how markets respond before taking additional policy action," he said.

The Fed's exit from quantitative easing has been complicated by fiscal policy - the federal government shut down in the first half of October as Congressional Republicans sought to undermine President Obama's signature health care law as a condition of funding the government.

While an expected drag from that shutdown on the economy has yet to show up in recent data - manufacturing figures, in fact, surprised to the upside - key figures on Friday could shed light on the question.

Those non-farm payrolls data are significant for the Fed, which wants to see unemployment closer to 6.5 percent from the current 7.2 percent. Economists in a Reuters poll see the figure edging up to 7.3 percent in October.

Still, the government shutdown could muddy Friday's payrolls figures, clouding their predictive value.

The Treasury's refunding announcement - it will sell $30 billion in three-year notes, $24 billion in 10-year notes, and $16 billion for 30-year bonds next week - was about as expected and had no discernible market impact.

The Treasury also said it would sell two-year floating rate notes in 2014, with further details to be announced on Jan. 23 for an initial auction set for Jan. 29.

"We would expect $120 billion to $140 billion in floating rate issuance over the course of 2014," said Citigroup strategist Brett Rose. "Floating rate notes should be considered as a substitute for Treasury bills."

Prices for U.S. benchmark 10-year Treasury notes rose 7/32 in price to yield 2.638 percent from 2.7 late on Tuesday.

The U.S. 30-year bond slid 4/32 in price to yield 3.765 percent, compared to 3.758 percent late on Tuesday.

As part of its ongoing stimulus program, the Fed on Wednesday bought $3.171 billion of Treasuries maturing between November 15, 2020 and August 15, 2023.