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US bond prices dip on jitters over Fed tapering

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U.S. Treasury prices slipped on Tuesday with benchmark yields edging up from five-week lows on concerns about the Federal Reserve further paring its bond-purchase monetary stimulus at its policy meeting next week.

Some traders attributed those worries stemming from an article in The Wall Street Journal that said the U.S. central bank will likely reduce its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $65 billion.

"The view out there is there's going to be continued tapering on a gradual basis. Another $10 billion in tapering is a logical way to go," said Mike Cullinane, head of Treasuries trading with D.A. Davidson in St. Petersburg, Florida.

Such a move followed the somewhat surprising decision from the Fed to begin shrinking its third round of quantitative easing (QE3) at its December policy meeting by reducing its bond purchases in January by $10 billion from $85 billion.

Fed officials will hold their next monetary policy meeting on Jan. 28-29.

"The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank's expectations for solid U.S. economic growth this year," The Wall Street Journal story published late Monday said, citing interviews with officials and their public comments.

Some analysts downplayed the article in The Wall Street Journal as a key factor exerting downward pressure on Treasuries prices. They reckoned the modest decline on light volume and hedging tied to mortgage holdings after a U.S. holiday weekend.

U.S. financial markets were closed on Monday in observance of the Martin Luther King Jr. holiday.

As traders speculate on possible further tapering, the Fed plans to buy, later on Tuesday, $1.00 billion to $1.50 billion in Treasuries due in 2036 to 2043, which is its latest QE3 purchase.

The 30-year bond managed to climb higher due to traders positioning for the Fed's latest buyback operation earlier. It last traded up 5/32 with a yield of 3.741 percent, down 1 basis point from Friday's close.

Benchmark 10-year Treasurys notes last traded 1/32 lower in price with a yield of 2.827 percent, up about 1 basis point from late on Friday.

The 10-year yield was as high as 2.867 percent overnight after hitting 2.818 percent last Friday, which was its lowest level since Dec. 11, according to Reuters data.

Traders and analysts anticipated the 10-year yield to hold in a range between 2.75 percent to 3.00 percent heading into the Fed policy meeting next week.

"I don't see a lot to shake us out of this range," D.A. Davidson's Cullinane said.

—By Reuters

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