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TREASURIES-Yields inch up for second day ahead of Fed minutes
January 4, 2017 / 3:26 PM / a year ago

TREASURIES-Yields inch up for second day ahead of Fed minutes

NEW YORK, Jan 4 (Reuters) - U.S. Treasury debt yields edged higher on Wednesday for a second straight day in quiet trading as they continued to benefit from increased market appetite for risk with the rise in stocks and oil prices as well as an improving global economic environment.

“Yesterday we had a confluence of factors that led to higher yields: we had strong inflation numbers from overseas; we had oil starting to rally,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.

“This is just momentum from yesterday’s selloff that’s really pushing yields higher today,” she added.

The U.S. economic calendar was thin on Wednesday so investors focused on the minutes of the latest Federal Reserve monetary policy meeting due later in the session. The minutes were expected to provide justification for the increase in U.S. interest rates last month and could reinforce the market’s general belief that the economy can absorb further tightening.

The risk, however, is that the Fed tries to downplay the increases in interest rate forecasts, or the so-called dot-plot, by emphasizing the fact it only took a few forecast changes to tip the scale, said BMO Capital Markets in a research note.

“While the dot-plot is certainly that sensitive, the Chairwoman (Fed Chair Janet Yellen) was unable to walk the market back from the initial bearish response and so we’d be skeptical of any attempts to do so via the minutes,” the bank said.

Analysts also said the overall bias of the market was for higher Treasury yields, which move inversely to prices, amid what is known as “rate-lock selling” during an expected heavy corporate issuance calendar this month.

Wall Street dealers typically lock in borrowing costs for corporate bonds they are underwriting by selling Treasuries as a hedge before the deal is completed. Once the bond is sold, the dealer buys back Treasuries to exit the rate-lock.

In mid-morning trading, the U.S. 10-year note was down 1/32 in price to yield 2.457 percent, compared with 2.454 percent late on Tuesday.

U.S. 30-year bond prices were down 2/32, yielding 3.053 percent, up from Tuesday’s 3.05 percent.

U.S. two-year note prices were flat, yielding 1.234 percent , compared with 1.226 percent on Tuesday. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Meredith Mazzilli)

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