TREASURIES-U.S. bond prices fall as Bunds weaken, ahead of Fed

Sam Forgione
Wednesday, 22 Jan 2014 | 3:48 PM ET

* Benchmark yields hold within recent trading range

* Sizzling demand for Spanish debt chills German bonds

* Fed bought $2.81 bln bonds due 2022-2023

NEW YORK, Jan 22 (Reuters) - U.S. Treasuries prices fell on Wednesday and benchmark yields edged up from five-week lows, with prices dragged lower by weaker German government debt.

Bund prices declined partly on robust demand for a new 10-year issue of Spanish government debt, signaling investors' appetite for riskier euro zone assets as the region shows some signs of better times ahead.

"Treasuries were largely following Bunds," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.

U.S. government debt prices were also pressured by hedging tied to this week's corporate debt supply and worries about the Federal Reserve further pulling back stimulus at its policy meeting next week.

Even so, Treasuries yields have held in a tight trading range between 2.80 percent and 3.00 percent since the beginning of the year.

"There is such a void of information," said Ader. "We're not making big moves."

In the absence of major economic data this week, most investors moved to the sidelines, awaiting the Fed's decision on policy when it meets next Tuesday and Wednesday.

There is a growing consensus that Fed policymakers will shrink its quantitative easing for a second straight meeting. Some analysts forecast the Fed will lower its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $65 billion, following the $10 billion cut to monthly purchases decided on last month.

"The market has basically started to price in $10 billion in tapering," said Aaron Kohli, interest rate strategist at BNP Paribas in New York. "As far as the Treasury market is concerned, it's largely a done deal."

According to a J.P. Morgan Securities survey, 68 percent of the firm's Treasuries clients said on Tuesday they had a neutral position in U.S. government debt, up from 64 percent the previous week.

In the meantime, the U.S. central bank bought $2.81 billion in Treasuries due from May 2022 to November 2023 for its stimulus program.

On the open market, benchmark 10-year Treasury notes were down 9/32 in price with a yield of 2.856 percent, up 3 basis points from late on Tuesday.

The 10-year yield fell to 2.818 percent last Friday, which was its lowest since Dec. 11, according to Reuters data.

Treasuries lagged their German counterpart with the 10-year yield premium over 10-year Bunds rising to 1.1 percentage points, the biggest in two weeks.

The yield on 10-year Bunds rose to 1.755 percent from 1.744 percent on Tuesday.

While benchmark U.S. and German yields rose, peripheral euro zone government yields fell, led by Spain.

Spain issued 10 billion euros of a new 10-year bond via a syndicate of banks in a sale that drew bids of almost 40 billion euros, a record among European governments.

The yield on 10-year Spanish sovereign debt fell near eight-year lows on Wednesday at 3.715 percent.

As for domestic supply, U.S. companies sold about $11 billion in investment-grade debt on Tuesday, bringing the month-to-date total close to $83 billion, according to IFR, a unit of Thomson Reuters.