TREASURIES-U.S. bond prices rise as Yellen backs current stimulus

Wanfeng Zhou
Thursday, 14 Nov 2013 | 4:10 PM ET

* Yellen backs current easy Fed policy to support economy

* Sale of $16 billion of 30-year bonds has poor results

* Fed to sell $13 billion 10-year TIPS next week

NEW YORK, Nov 14 (Reuters) - U.S. Treasury debt prices rose on Thursday after Janet Yellen, nominated to lead the Federal Reserve, bolstered expectations the central bank will maintain its economic stimulus for the time being. Answering questions before the Senate Banking Committee, Yellen said while the central bank's bond buying will not go on forever, it is important not to end it prematurely since the economy is still fragile. Government bonds had rallied after Yellen's prepared remarks to the committee, in which she said the Fed has "more work to do", were released late on Wednesday. But momentum faded a bit after a poor debt auction early Thursday afternoon. "We got our big boost from the Yellen testimony late yesterday afternoon, and today's price action is being soured by the disappointing 30-year bond auction," said Gary Pollack, head of fixed income trading at Deutsche Bank Private Wealth Management in New York. Investors view Yellen, along with out-going Fed Chairman Ben Bernanke, as a strong proponent of the Fed's current ultra-loose monetary policy. They reckon a Fed under Yellen's leadership will continue this stimulative stand with the goal to lower unemployment and to raise inflation. "I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy," Yellen said in prepared remarks released late Wednesday.

"She has always been on the dovish side. It's not surprising she says that quantitative easing is still necessary," said Sharon Stark, chief fixed income strategist at D.A. Davidson in St. Petersburg. Analysts also attributed the market gains to traders exiting bets on lower prices spurred by an encouraging jobs report last Friday, rather than a wave of bullish bets on Treasuries. On the open market, benchmark 10-year Treasury notes were 15/32 higher in price with a yield of 2.698 percent, down 5 basis points from late on Wednesday. Thirty-year bonds were up 18/32 after gaining more than 1 point. Their yield fell to 3.797 percent, down 3 basis points from Wednesday's close. Longer-dated yields have retraced more than half of the October jobs data-related increase, with the 10-year yield testing its 50-day moving average in the 2.68 percent area.

POOR AUCTION Treasuries prices pared gains after the Treasury sold $16 billion in 30-year bonds at a high yield of 3.810 percent. The bid-to-cover ratio, or the total bids to the amount offered, was 2.16, the lowest ratio since August and the second lowest in more than two years. The newest U.S. 30-year Treasury bond issue will offer the highest coupon rate since 2011, according to data from the U.S. Treasury Department. The 30-year supply follows back-to-back solid auctions of three-year and 10-year notes on Tuesday and Wednesday. With the focus on the Yellen hearing, traders brushed off trade and labor market data suggesting a U.S. economy in need of continued aggressive stimulus from the Fed. The Fed on Thursday bought $3.171 billion in Treasuries maturing from November 2020 to August 2023 as part of its latest stimulus efforts. While the central bank sticks to its bond-buying program to support the economic recovery, the government has been selling debt to finance its spending. The Treasury Department said it sell $13 billion of reopened 10-year Treasury inflation indexed notes next Thursday. That 10-year TIPS issue last traded at a yield of 0.502 percent, down over 5 basis points on the day.