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CORRECTED-TREASURIES-U.S. bond prices rise as higher yields draw buyers

the first quarter of 2014. Four of them reckoned the Fed
Tuesday, 10 Dec 2013 | 5:04 PM ET

(Replaces outdated headline)

* U.S. sale of $30 billion three-year notes is well bid

* Fed buys $1.40 billion long-dated TIPS for QE3

NEW YORK, Dec 10 (Reuters) - U.S. Treasuries prices rose on Tuesday as traders covered short positions and portfolio managers, tempted by yields near the high end of the range, extended duration going into year-end. The motivated buyers helped create a solid bid for the Treasury's sale of three-year notes, the first of three coupon auctions this week. The Treasury will sell 10-year notes on Wednesday and a re-opened 30-year issue on Thursday. "A lot of people are short and you're seeing some end-of-year buying taking place," said Wilmer Stith, portfolio manager of the Wilmington Broad Market Bond Fund. "If you think the 10-year Treasury yield is in a range between 2.5 percent and 3 percent, we were in the upper part of that range over the last couple of days," he noted. Without anything definite to point to a Fed tapering of purchases in December or even January, people figure yields could go down to the center of the range, making yields at the higher end of the range look appealing, Stith said. "Also, people are short their duration bogeys," he said, referring to the amount of duration sought in a portfolio, "and they are using the higher yields as an opportunity to extend to year end." Stith said the nature and timing of when the Fed will trim or reduce its $85 billion a month in purchases of Treasuries and mortgage-backed securities remains the market's main focus. But he cautioned that for policy cues, the Fed isn't just looking "myopically" at the unemployment rate. "They are also looking at these broader thematic aspects of the labor market that aren't really improving that much, including disappointing labor market participation," he said. "We are also on the eve of nominating the most dovish Fed chairperson in the history of the Fed so you'd think the market would put this tapering issue in its proper context," he said. "If the Fed trims its purchases by $5 billion or $10 billion a month, it doesn't seem like such a big deal." Indeed, Stith and others said yields, which rose earlier this year when the market mistakenly concluded tapering was in the immediate offing, might already have accounted for fewer purchases by the Fed. "Credit spreads are quite a bit tighter and financials are trading inside of industrials," said Susan Gibbons, vice president and portfolio manager, fixed income, at RBC Global Asset Management, referring to the corporate bond market. "That tells me that credit markets are not concerned about taper." Even if the Fed were to signal a pullback in bond purchases, policy-makers will likely opt for a small one so as not to prompt a bond market sell-off that would send long-term interest rates higher and hurt the housing market. Eighteen of the 21 primary dealers or banks that do businesses directly with the Fed, polled on Friday by Reuters, expected the U.S. central bank would pare back its $85 billion monthly purchases of Treasuries and mortgage-backed securities might decide on tapering after its meeting next week.

Tuesday's economic figures on wholesale inventories and job openings supported the view that conditions might have improved enough for the Fed to start scaling back its QE3 bond purchases.

The U.S. central bank on Tuesday bought four issues of Treasuries Inflation Protected Securities, worth $1.40 billion as a part of its intended $45 billion in government debt purchases in December. The benchmark 10-year note rose 11/32 in price to yield 2.80 percent. The 10-year yield had climbed to 2.93 percent on Friday, the highest since Sept. 11, in a reaction to a stronger-than-forecast jobs report for November. The 30-year Treasury bond was last up 23/32 in price after rising more than 1 point earlier. The 30-year yield eased to 3.830 percent after hitting 3.980 percent last Friday.

(Additional reporting by Richard Leong; Editing by Chizu Nomiyama and Meredith Mazzilli)