Bonds

Treasurys Rise on Expectations for Fed Support

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U.S. Treasury debt prices rose on Wednesday, prompted by bets the Federal Reserve will stick to its bond purchase program, which aims to cut unemployment, as long as inflation remains muted.

Benchmark yields fell for a fourth straight session to their lowest in two weeks on safe-haven bids linked to anxiety about a possible protracted fight in Washington over raising the $16.4 trillion federal borrowing limit, analysts said.

"It's the continued buying from the Fed which is bringing good support to the market," said Jason Rogan, director of Treasurys trading at Guggenheim Partners in New York.

The Fed on Wednesday bought $1.474 billion in federal debt maturing from February 2036 through November 2042, which was a part of its $45 billion monthly purchases of Treasurys.

While some investors have questioned the effectiveness of this third round of quantitative easing, dubbed QE3, many top Fed officials including Chairman Ben Bernanke have stated their support of it in recent days because the economy has not been expanding fast enough to bring down unemployment.

Moreover, the modest pace of business activity could easily be wiped out by fiscal disruption due to the political tension in Washington, analysts said.

The Fed's latest Beige Book, a collection of anecdotes on regional economic conditions, showed mild growth across the United States in recent weeks but it signaled no impetus that economic expansion will accelerate.

With this moderate growth, U.S. consumer prices barely grew in December. Analysts reckoned this climate allows the Fed room to keep buying bonds to hold down long-term borrowing costs and leave short-term policy rates near zero.

Ten-year Treasury notes rose 6/32 in price at 98-7/32 with their yields at 1.815 percent, down from 1.836 percent late on Tuesday.

Thirty-year bond prices increased 10/32 to 94-29/32, yielding 3.009 percent, down from 3.206 percent late on Tuesday.

Bond prices retreated from their earlier highs as Wall Street stocks pared their initial losses on strength in the bank and technology sectors.

(Read More: As Risk Appetite Returns, What Next for Treasurys?)

U.S. CDS Touches Highest Since August 2011

Worries about a protracted fight over the federal debt ceiling have caused some investors to raise their stakes in Treasurys in anticipation of weakening appetite for stocks and other risky assets.

On the other hand, if the debt limit is not raised in the coming weeks, the United States will default on its debt and faces a likely downgrade of its credit rating.

While traders still assigned a low chance of a U.S. default as early as late February, the derivatives market signaled anxiety about such an outcome has intensified.

"Each passing day without a deal, the risk goes up," said Perry Piazza, director of investment strategies at Contango Capital Advisors in San Francisco, adding, "I still think the probability (of a default) is pretty low."

In the credit default swap market, the five-year cost to insure against a U.S. default ended unchanged on the day at 43 basis points, according to data firm Markit. The five-year CDS price on U.S. Treasurys rose to 44 basis points earlier, the highest since August 2011 during the first debt ceiling battle between U.S. President Barack Obama and Republican lawmakers,

Interest rates on Treasury bills maturing in late February to the end of February when the U.S. government might not be able to sell more debt without an increased borrowing cap dipped on Wednesday but they remained higher than the interest rates on T-bills due in April and beyond.

US Treasury Yields

U.S. Treasurys