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TREASURIES-Bonds concede most gains before supply

Ellen Freilich
Monday, 9 Dec 2013 | 4:18 PM ET

* Fed bought $1.48 billion bonds due 2038 and 2043

* Fed bought $3.181 billion in Treasury coupons 2021 to 2023

* Treasury to sell $64 bln in 3, 10, 30-yr notes this week

* Fed policy meeting next week in focus for tapering signals

NEW YORK, Dec 9 (Reuters) - U.S. Treasuries prices rose on Monday, aided by two sets of Federal Reserve bond purchases, and then conceded most of those gains as traders focused on upcoming supply. The Fed bought $1.48 billion in bonds due 2038 and 2043 and $3.18 billion in Treasury coupons due 2021 to 2023. Once those Fed operations were complete, the market focused on the $64 billion in three-, 10- and 30-year supply coming this week and more supply coming after that. "We had two buybacks today and then the market retreated due to the long-end supply coming on Wednesday and Thursday," said Thomas di Galoma, co-head of fixed income rates at ED&F Man Capital in New York. "Repricing is the story of the day. We have a ton of supply coming over the next eight trading days." Comments from Fed officials were "mixed," said CRT Capital Group government bond strategist Ian Lyngen, calling the day's trade "a sideways grind" that left the market little changed. The market is also focused on the Fed's next policy meeting on Dec. 17-18, looking for hints as to when the central bank could start to trim its large-scale bond purchases as well as for signals on possible "forward guidance" from the Fed on what thresholds for unemployment - or even inflation - it would want to see before starting to hike short-term interest rates. "The Fed will likely pair a tapering announcement with some more dovish commentary with regard to forward guidance on interest rates," said Gene Tannuzzo, fixed income portfolio manager at Columbia Management. The steepness of the Treasury yield curve shows the Fed has already successfully separated the eventual curbing of its bond purchases from the act of boosting short-term rates, he said. "Short-term rates remain low even though the market knows that in the not-too-distant future, the Fed will no longer be the primary buyer of Treasuries," Tannuzzo said. "That's why the curve is as steep as it is. "We think 2.65 percent to 2.90 percent is fair value for 10-year Treasury yields," he added. The Federal Reserve will begin reducing its massive bond-buying program no later than March, according to a Reuters poll of 18 of the 21 primary dealers conducted Friday.

The benchmark 10-year Treasury was up 9/32 in price late on Monday, yielding 2.85 percent. "We're meaningfully higher in interest rates than we were six months ago so in the market's view, the Fed has already tapered," Tannuzzo said. That means the next popular trade could be 5s to 30s curve flatteners. "The belly of the curve remains extremely vulnerable," said Rajiv Setia, head of U.S. rates research at Barclays Global Outlook media briefing in New York on Monday. "Our favorite trade is belly-to-long-end flatteners." Setia said he expected 10-year Treasuries to yield 3 percent and 30-year Treasuries to yield 4 percent at mid-2014. In the very near term, with supply the main diversion before the Fed's policy meeting next week, benchmark 10-year yields should remain range-bound between 2.75 percent and 2.90 percent, Tannuzzo said. The Treasury will sell $30 billion in three-year notes on Tuesday, $21 billion in a 10-year reopening on Wednesday and $13 billion in a 30-year reopening on Thursday. Retail sales data on Thursday will also be watched for signs of strength in consumer spending.