By Ellen Freilich and Richard Leong
NEW YORK, Dec 13 (Reuters) - Long-dated U.S. Treasuries
prices rose on Friday as the yield curve flattened amid muted
The subdued inflation data reinforced the idea that the
Federal Reserve would not reduce bond purchases aimed at
stimulating the economy until 2014.
The stronger performance followed losses on Thursday due to
slightly stronger than expected November retail sales and a poor
$13 billion auction of 30-year bonds, the final part of this
week's $64 billion in coupon-bearing supply.
Traders were watching to see what the Fed says about the
fate of its third round of quantitative easing when its
policy-setting committee meets next week.
'Will the Fed start reducing its purchases next week? No.
Absolutely not. But there's been enough good economic data to
justify some purchases at the long end of the yield curve,' said
Paul Montaquila, vice president and fixed-income investment
officer, at Bank of the West's capital markets division in San
The latest purchase program has added over $1 trillion to
the Fed's balance sheet. All three rounds of accommodation have
added more than $3 trillion to the Fed's balance sheet.
The Labor Department said its index on producer prices fell
for a third straight month, dipping 0.1 percent in November.
Analysts polled by Reuters had forecast PPI likely held at its
October level last month.
The PPI core rate, which excludes volatile food and energy
prices, edged up 0.1 percent - in line with economists'
expectation. On a year-over-year basis, it grew 1.3 percent,
supporting the view that domestic inflation is running below the
Fed's desired level of 2 percent.
'The PPI showed very little inflation, so the Fed has room
to be patient with tapering,' said Mike Cullinane, head of
Treasuries trading at D.A. Davidson in St. Petersburg, Florida.
Fed policy-makers who will meet Tuesday and Wednesday have
worried that meager price increases put the economy at risk of
deflation, a phenomenon that tends to slow economic activity.
On the open market, benchmark 10-year Treasury notes rose 2/32 in price, leaving their yields at 2.88
percent. They ended last week at 2.84 percent.
The 30-year bond rose 10/32 in price. Its yield
eased to 3.88 percent, down for 3.90 percent late on Thursday,
but up from 3.87 percent a week ago.
'The PPI was pretty weak so the long-end bounced back,' D.A.
Davidson's Cullinane said.
Short-dated issues stabilized after their yields broke above
key support levels on Thursday, suggesting anxiety about how
long the Fed will keep policy rates near zero after it stops
buying bonds, currently at a monthly pace of $85 billion.
The Fed bought $1.575 billion in long-dated Treasuries due
in May 2038 to February 2043, its third such purchase for the
QE3 program this week.
The two-year yield edged up to 0.330 percent from
0.326 percent late on Thursday. It traded to an eight-week high
of 0.342 percent on Thursday, piercing above its 100-day moving
Investors will face another wave of supply next week: $32
billion in two-year notes; $35 billion in
five-year debt; $29 billion in seven-year notes and $16 billion in five-year Treasury
FASTER U.S. JOB GROWTH
While U.S. central bankers consider how to maintain price
stability, they have seen encouraging signs on the labor front
with the recent pickup in monthly job creation.
Improving employment conditions, together with resilience in
the housing and manufacturing sectors in the aftermath of a
16-day government shutdown in October, have raised expectations
the Fed is gearing for an exit from QE3 in 2014.
Thirty-two economists expect the Fed to taper its third
round of quantitative easing in March, while 22 said it would
scale back its bond-buying program in January, according to a
Reuters poll released on Wednesday. Only 12 economists expected
a tapering announcement next week.
'The big picture is that tapering is coming whether it's
December, January or March. The economy is strong enough to
remove the crutch of bond buying,' said Cliff Corso, chief
executive officer at Cutwater Asset Management in Armonk, New
An encouraging fiscal development in Washington also caused
some traders to believe the Fed will opt to taper sooner rather
than later. Late Thursday, the U.S. House of Representatives
passed a two-year budget deal that will stave off a government
shutdown in January and mitigate automatic spending cuts.
(Additional reporting by Richard Leong; Editing by Theodore
d'Afflisio, Kenneth Barry and Andrew Hay)
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Keywords: MARKETS USA BONDS/
(-------MARKET SNAPSHOT AT 4:15 p.m. EST (2100 GMT)------- March T-Bond 129-21/32 (+12/32) March 10-Year note 124-10/32 (+02/32) Change vs Current Nyk yield Three-month bills 0.065 (+0.00) 0.066 Six-month bills 0.085 (-0.01) 0.086 Two-year note 99-27/32 0.330 Five-year note 98-21/32 1.531 10-year note 98-31/32 (+03/32) 2.868 30-year bond 97-26/32 (+12/32) 3.874 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 10.00 (unch) U.S. 3-year dollar swap spread 8.50 (+0.25) U.S. 5-year dollar swap spread 8.75 (unch) U.S. 10-year dollar swap spread 6.00 (unch) U.S. 30-year dollar swap spread -9.00 (+0.75))
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