TREASURIES-Yields climb as hawkish Fed speakers favor tapering

J.P. Morgan Securities.
Tuesday, 14 Jan 2014 | 3:02 PM ET

* Short-covering since employment report seen as completed

* Prices dip as retail sales point to stronger U.S. economy

* Fed buys $1.39 bln bonds due 2038-23

* Treasury sells $15 bln four-week notes at zero yields

NEW YORK, Jan 14 (Reuters) - U.S. Treasury yields rose on Tuesday as two Federal Reserve officials said they support further cuts to the U.S. central bank's bond purchase program, despite Friday's weaker-then-expected employment report. Charles Plosser, president of the Philadelphia Fed, and Dallas Fed chief Richard Fisher, who spoke separately on Tuesday, are both considered policy hawks. Plosser downplayed the payrolls report and said he would prefer a quicker-than-planned withdrawal of policy stimulus.

Fisher said the Fed should pare its bond buying as quickly as possible, even if doing so sends stock prices tumbling, because more bond buying risks inflation and makes an eventual exit from easy policies more difficult. 1/8ID: nN9N0AR023 3/8 Five-year notes, which are among the most sensitive to Fed interest rate policy, were among the worst performers, and benchmark 10-year notes retraced all of Monday's gains. The selloff came after a two-day rally, which was caused in large part by investors who on expectations of strong jobs numbers had taken short positions heading into Friday's payrolls report and then had to cover those trades. "Plosser and Fisher, both noted hawks, reiterated their view of QE and the economy," said Jason Rogan, managing director in Treasuries trading at Guggenheim Partners in New York. At the same time, the selloff is "a retracement of a really good short-cover rally after Friday's number that continued into yesterday. Most of the shorts were pushed out and forced to cover." Five-year notes were last down 8/32 in price to yield 1.652 percent, up from 1.589 percent late on Monday. The 10-year notes fell 11/32 in price to yield 2.875 percent, after holding levels of around 2.82 percent overnight, where there is strong technical resistance. Investors raised their holdings of longer-dated Treasuries after the jobs data, according to a survey released on Tuesday The share of investors who on Monday said their holdings of longer-dated U.S. government debt were greater than their holdings of portfolio benchmarks rose to 19 percent from 13 percent a week earlier, J.P. Morgan said. Friday's employment report also caused some investors to reevaluate growth expectations for this year, which had been getting more bullish. The Fed bought $1.39 billion in bonds due between 2038 and 2043 on Tuesday as part of its ongoing purchase program. It will purchase between $4 billion and $5 billion in notes due 2018 and 2019 on Wednesday. Solid retail sales data on Tuesday also eased some concerns about economic growth, with many saying that the employment figure was likely an aberration hurt by factors such as bad weather. "I don't think a lot has changed here, I think Friday's number was an outlier," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York. The Commerce Department said on Tuesday that U.S. retail sales, excluding automobiles, gasoline, building materials and food services, increased 0.7 percent last month after a 0.2 percent rise in November. Producer price data on Wednesday and consumer price data on Thursday will next be closely watched for signs that inflation is picking up, something that many expect but so far has failed to materialize. The Fed will also release its Beige Book report on Wednesday, a collection of anecdotes from the central bank's business contacts across the nation, which will be watched for signs of economic strength. The Treasury sold $15 billion in four-week bills on Tuesday at zero yields as it cuts issuance heading into Feb. 7, when the debt ceiling will be reinstated. Some dealers in the interdealer market have been offering negative bill rates to offset short positions in the repurchase agreement market that can be costly as supply dwindles.

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