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TREASURIES-U.S. bond prices steady before Fed policy meeting
June 18, 2013 / 8:08 PM / 4 years ago

TREASURIES-U.S. bond prices steady before Fed policy meeting

* Traders brace for possible hints of Fed paring bond
purchases
    * Low inflation seen enabling Fed to keep rates near zero
    * Investors raised longer bond holdings before FOMC -survey
    * Fed buys $1.46 bln bonds due 2036-2043


    By Karen Brettell and Richard Leong
    NEW YORK, June 18 (Reuters) - Most U.S. Treasuries prices
were little changed on Tuesday in light, choppy trading, as
investors awaited the outcome of the Federal Reserve's two-day
meeting for signs whether the U.S. central bank might scale back
its current stimulus program.
    The Fed's policy statement, to be released after the close
of the meeting on Wednesday afternoon, could affirm remarks by
Chairman Ben Bernanke last month that the U.S. central bank may
decide to trim the amount of bond purchases in the next few
meetings if the economic recovery maintains momentum.
    "It's very complicated for the Fed," said Guy LeBas, chief
fixed income strategist at Janney Montgomery Scott in
Philadelphia. "On the one hand their policies aren't having a
huge impact on economic growth going forward, on the other hand 
they need to maintain the ability to act in case deflation does
occur."
    The Fed's $85 billion monthly purchases of Treasuries and
mortgage-backed securities have lowered mortgage rates to
support the housing recovery and stoked appetite for stocks and
other risky investments. The program has been less successful in
creating jobs and snuffing out the risk of deflation - a
downward price spiral that can cripple an economy.
    The Fed bought $1.46 billion in bonds due from February 2036
to February 2043 on Tuesday for its Quantitative Easing 3 or QE3
program. 
    If the Fed on Wednesday signals the likelihood it might buy
fewer bonds later this year, analysts said it is critical for
policy-makers to tell markets they will continue to support the
economy by keeping short-term interest rates near zero even well
after it stops buying bonds.
    Investors will also monitor what Bernanke says at his press
conference after the releases of the Fed's policy statement, set
for 2 p.m. (1800 GMT) on Wednesday. Reporters will likely press
Bernanke not only on the path of monetary policy but also his
future at the Fed.
    U.S. President Barack Obama hinted in a television interview
that aired on Monday that he may be looking for a new Fed chief,
saying Bernanke has stayed a lot longer than the current
chairman had originally planned. 
    
    LOW INFLATION OFFERS FED LEEWAY
    The latest inflation data, some analysts and investors say, 
should enable Fed policy-makers to keep short-term rates low for
a protracted period and perhaps even to stick its current pace
of bond purchases into 2014.
    The government on Tuesday reported the U.S. Consumer Price
Index edged 0.1 percent higher in May, which was slightly weaker
than what analysts polled by Reuters expected, though price
pressures showed signs of stabilizing after a long decline.
 
    "The Fed has the cover it needs to continue with
quantitative easing," said James Camp, managing director of
fixed income at Eagle Asset Management in St. Petersburg,
Florida.
    The mild inflation data, together with bets the Fed might
surprise investors by telegraphing it is committed to its
current pace of stimulus at least into year-end, stoked buying
of the 30-year bond on Tuesday.
    A J.P. Morgan Securities survey, released on Tuesday, showed
more investors raised their holdings of longer-dated Treasuries
heading into the Fed's policy meeting. The share of the firm's
bond clients who said on Monday they held more longer-dated U.S.
government debt than their benchmarks rose to 19 percent, the
highest level in about five months. 
     
     
    In late trading, the 30-year bond was 2/32
higher in price with a yield of 3.347 percent, down 0.3 basis
point from late on Monday.
    Benchmark 10-year Treasuries were flat in price
at 96-4/32 with a yield of 2.185 percent.
    The 10-year yield rose to a session high in the wake of data
that showed a 6.8 percent rise in home construction last month,
although well below what analysts had forecast. 
    Treasury yields hit 14-month highs last week. Treasury
inflation-protected securities were hit especially hard during
the bond market sell-off with inflation expectations falling to
their weakest levels since last summer.
    Longer inflation expectations as measured by the yield
spread between 10-year TIPS and comparable regular
10-year Treasuries improved 2.08 percent late on Tuesday, up 2.5
basis points from Monday.

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