TREASURIES-U.S. bond prices rise on solid 30-year bond sale

the housing recovery and rising exports.
Thursday, 9 Jan 2014 | 2:25 PM ET

* U.S. $13 billion 30-year bond sale fetches solid demand

* U.S. jobless claims fall to lowest since November

* Fed's George uneasy about continued QE3 bond program

* Fed's Yellen sees 3 percent U.S. GDP in 2014 - magazine

NEW YORK, Jan 9 (Reuters) - U.S. Treasuries prices rose on Thursday as a $13 billion auction of 30-year bonds drew solid investor demand, even as the recent wave of upbeat economic data have signaled bond yields might climb higher. Perceived dovish comments from European Central Bank President Mario Draghi lifted German Bund prices, which in turn helped boost U.S. government debt, analysts and traders said. Most of the initial price rise in longer-dated Treasuries stemmed from the notion that the Federal Reserve might raise short-term interest rates from their near-zero level sooner than some traders had previously thought. These curve "flatteners" bet shorter- and medium-term yields would rise faster than long-dated ones, even after the Fed decided in December to pare its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $75 billion. "The front end of the yield curve might test the Fed's resolve to keep short-term rates low if unemployment falls at its current pace," said Mike Cullinane, head of Treasuries trading with D.A. Davidson in St. Petersburg, Florida. According to CME FedWatch, short-term U.S. interest rates futures implied traders now assign a 64 percent probability for the first Fed rate hike as early as April 2015, compared with 63 percent on Wednesday. Fed officials in recent days stressed that the U.S. central bank will likely leave short-term rates near zero for some time even as it reduces its bond purchases. The Fed bought $824 million in Treasuries that mature in 2024 to 2031 as part of its expected $40 billion purchase of U.S. government debt in January. Kansas City Fed President Esther George, known for her hawkish view on interest rates, said on Thursday "I remain concerned about the potential costs and consequences of these untested policies." She was speaking to bankers in Madison, Wisconsin. Benchmark 10-year Treasury notes last traded up 5/32 price to yield 2.975 percent, down 2 basis points from late on Wednesday. Just last week, the 10-year yield hit a near 2-1/2-year high of 3.041 percent, according to Reuters data. Amid a wave of curve flatteners, the yield spread between five-year and 30-year Treasuries shrank to 2.12 percent, the tightest level in four months.

ENCOURAGING JOBS OUTLOOK Financial markets will receive a broad snapshot of U.S. labor conditions on Friday at 8:30 a.m. (1330 GMT) when the Labor Department releases its December payrolls report. U.S. employers picked up hiring at the end of 2013, helped Wednesday's ADP private-sector payrolls report and Thursday's weekly jobless claims figures supported the view of ongoing improvement in jobs growth. The U.S. Labor Department said first-time filings for unemployment benefits totaled 330,000 last week, the lowest weekly level since late November. The ADP National Employment Report showed private jobs grew by 238,000 in December, the biggest monthly rise in 13 months. Economists polled by Reuters forecast employers likely added 196,000 jobs, down from 203,000 in November, while the jobless rate likely held at a five-year low of 7.0 percent.

With an improving labor backdrop, Janet Yellen, set to take over as the head of the Federal Reserve from Ben Bernanke in February, is "hopeful" that U.S. economic growth will improve in 2014 to reach 3 percent or more and persistently low inflation will move up toward the central bank's target of 2 percent, according to a Time magazine interview released Thursday.

Yellen's ECB counterpart Mario Draghi rang a more cautious note on the euro zone economy where inflation is sagging further into a "danger zone" below 1 percent. Draghi signaled at a press conference the ECB is ready to do more to prevent further slowing in price growth. Ahead of Friday's critical payrolls report, it was unclear how aggressively investors would bid for the latest supply of 30-year Treasury bonds, the last leg of this week's $64 billion in coupon-bearing supply. Primary dealers, top Wall Street firms that do business directly with the Fed and make a market for Treasuries, ended up buying only 38 percent of the 30-year Treasuries supply, below the 12-month average. This also implied solid demand from large investors and foreign central banks. "This is was a fairly strong auction," Jefferies & Co. money market strategist Thomas Simons wrote in a research note.