February 23, 2018 / 2:31 PM / a month ago

TREASURIES-Yields fall on stock market jitters, month-end demand

    * Nerves about volatile stock markets seen helping bonds
    * Month-end demand may boost fixed income
    * Fed chief Powell's testimony in focus next week

    By Karen Brettell
    NEW YORK, Feb 23 (Reuters) - U.S. Treasury prices gained on
Friday as uncertainty about recent stock market volatility
helped boost demand for the bonds and as investors began to
rebalance portfolios ahead of the end of the month.
    Continuing nerves about the direction of stocks led some
investors to seek out lower-risk assets.
    "There's been some substantial buying that seems to be
sustaining amid concerns about the equity markets," said Guy
LeBas, chief fixed income strategist at Janney Montgomery Scott
in Philadelphia.
    "We're also entering the month-end rebalancing period, and
after the spurt of volatility we had in all markets, but
particularly in equities, it may encourage some rebalancing
towards fixed income," LeBas said.
    Benchmark 10-year notes             were last up 7/32 in
price to yield 2.892 percent. The yields have fallen from a
four-year high of 2.957 percent on Wednesday.
    Investors will turn their attention to Federal Reserve Chair
Jerome Powell's first semi-annual Humphrey Hawkins testimony to
Congress on Tuesday and Thursday, which will be watched for any
update on the U.S. central bank's economic forecasts in light of
the Trump administration's tax cuts and spending plans, and a
recent uptick in inflation.
    "It's not just the recent data, because in the short term
it's very random, but on the Fed's level of confidence in
inflation over the next six to 12 months," said LeBas, adding
that inflation "will establish whether we see three or four rate
hikes during the year."
    Fed speakers on Friday will include New York Fed President
William Dudley, Boston Fed President Eric Rosengren, Cleveland
Fed President Loretta Mester and San Francisco Fed President
John Williams.
    Bonds were also supported on Friday by the completion of
$258 billion in new supply this week, which was the second
largest ever over a three-day period.             
    The Treasury is facing higher debt needs due to the
government's tax overhaul, which is expected to worsen the U.S.
deficit, while a two-year budget deal reached this month will
increase spending by $300 billion.             
    The U.S. government also needs to replenish its cash
balance, which was depleted as lawmakers negotiated to increase
the debt ceiling, and enlarge its debt auctions to make up for
declining purchases by the Fed, which had been tacked onto debt
sales and not included in the auction sizes.
    Bank of America Merrill Lynch on Friday said it expects
10-year yields to rise to 3.25 percent this year because of
faster economic growth and due to higher debt issuance amid
weakening demand.

 (Editing by Paul Simao)
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