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TREASURIES-U.S. bond prices rise after bleak 2013

Richard Leong and Luciana Lopez
Thursday, 2 Jan 2014 | 3:46 PM ET

* Benchmark yields dip below 3 percent at start of 2014

* U.S. Dec factory activity held near 2-1/2-year high

* Treasuries lost 2.75 percent in 2013, long-dated fell 13.88 percent

* World's biggest bond fund posts 1st annual loss since 1999

NEW YORK, Jan 2 (Reuters) - U.S. Treasuries prices rose on Thursday with benchmark yields dipping below 3 percent from their 2-1/2-year highs, as investors socked some money back into bonds from stocks that had enjoyed their strongest annual gain in more than 15 years. The government debt market stabilized on the first trading day of 2014 after a dismal year when it recorded its third biggest annual loss in 40 years, according to Barclays data. Analysts and investors expect Treasuries yields to rise further in the coming months if U.S. unemployment falls and inflation picks up, propelling the Federal Reserve to continue its reduction in its massive bond-purchase stimulus. "There is a meaningful bearish sentiment in bonds right now, but we might see relief in the next few days," said Robbert Van Batenburg, director of market strategy at Newedge USA LLC in New York. Last month, the U.S. central bank said it will purchase $75 billion Treasuries and mortgage-backed securities in January, $10 billion less than the monthly pace it had been buying when its third round of quantitative easing began in late 2012. The Fed will resume its QE3 program on Monday with a planned $1.00 billion to $1.50 billion purchase of bonds due 2036-2043. Easy money from the Fed had held down mortgage rates and other long-term borrowing costs and has fed appetite for stocks and other risky assets. The Standard & Poor's 500 index just booked its biggest yearly gain since 1997. On Thursday, the S&P 500 fell 1 percent, while other major U.S. indexes declined fell nearly by the same amount on profit-taking. U.S. financial markets reopened on Thursday after they were closed for the New Year's Day holiday. "We're seeing some of that dynamic, weaker stocks, money going into Treasuries," said Kim Rupert, managing director for global fixed income analysis at Action Economics in San Francisco. Revived bidding for Treasuries was mitigated by mildly encouraging economic figures, analysts said. The government said the number of Americans filing new claims for jobless benefits fell last week, while a private-sector report showed U.S. manufacturing activity held close to a 2-1/2-year high.

These readings supported the view of ongoing U.S. economic growth in early 2014, although they were not strong enough for analysts to upgrade their growth views and to revise their forecasts on U.S. yields. The consensus outlook is that the 10-year yield would reach 3.50 percent this year, which might lead to a minor annual loss for Treasuries.

ROUGH YEAR FOR BONDS In 2013, Treasuries posted a 2.75 percent decline, the first yearly loss since 2009 when they booked their biggest drop in four decades at 3.58 percent. Long-dated maturities were the biggest drag on the sector, falling 13.88 percent, according to indexes compiled by Barclays. Barclays' Aggregate bond index, which tracks Treasuries and other U.S. investment-grade bonds, fell 2.02 percent last year, its second biggest annual loss since 1976. The Pimco Total Return Fund, the world's largest bond fund, had a negative return for its first annual loss in 14 years, according to preliminary data from Morningstar released on Thursday. After a miserable 2013, Treasuries regained a bit of footing at the start of the new year. The benchmark 10-year Treasury note rose 5/32 in price to yield 2.985 percent, down 2 basis points from late on Tuesday. The 10-year yield hit 3.041 percent earlier. The U.S. 30-year bond climbed 11/32 in price to yield 3.921 percent, down 2 basis points from late Tuesday. A year ago, the 10-year yield was 1.835 percent and the 30-year yield 3.040 percent. Trading volume picked up from its holiday-related lows. Tradeweb said Thursday's the amount of Treasuries which changed handed was 19 percent above its 30-day average.

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