Bond yields gain as investors fear more hawkish Fed

By Chris Reese

NEW YORK (Reuters) – U.S. Treasury yields rose on Tuesday ahead of the release of minutes from the Federal Reserve’s March meeting on March 15 just after the Japanese earthquake and tsunami.

However, some Fed officials last week expressed a more hawkish tone in regards to monetary policy, and investors were mulling whether the central bank might move to raise interest rates sooner than originally expected.

By contrast on Monday night Federal Reserve Chairman Ben Bernanke said a recent rise in U.S. inflation was driven primarily by rising commodity prices, and that they were unlikely to persist.

“People are still concerned about inflation and dissension on the Fed,” said Mary Ann Hurley, vice president of fixed income-trading at D.A. Davidson & Co in Seattle.

The Fed will release the minutes from its March 15 policy meeting at 2 p.m. eastern time, although some did not expect any reflection of a gulf between the hawks and the doves on the central bank’s monetary policy setting committee.

“I would expect the minutes to echo what Bernanke said last night, that they are concerned about rising commodity prices but they are being viewed as transitory,” Hurley said.

Rumors that the Federal Reserve was conducting a reverse repurchase agreement in an attempt to ease a squeeze in short-term rates weighed on the market, traders said.

According to the New York Fed’s website, the Fed had not conducted any reverse repurchase operations as of late Tuesday morning. Typically, such operations are undertaken in the early afternoon, and the details are posted on the New York Fed’s website.

Treasuries erased early gains on Tuesday morning after PIMCO Chief Executive Bill Gross said on CNBC that Treasuries are unattractive at current yields.

“Gross was quite bearish on the bond market, he thought Treasuries were completely overvalued and the market made a U-turn while he was speaking,” said Tom Tucci, head of government bond trading at RBC Capital Markets in New York.

The comments may have also refocused investor attention on Fed plans to unwind monetary stimulus, which will include the end of its $600 billion bond purchase program in June.

“I think in general people are getting very hypersensitive to where the Fed is at,” Tucci said. “I would imagine that people are anticipating that today in the minutes there is probably a little bit more of an upgrade to their economic outlook.”

Two-year Treasury notes were trading 3/32 lower in price to yield 0.82 percent, up from 0.77 percent Monday, while five-year notes were down 9/32 to yield 2.25 percent from 2.19 percent.

Benchmark ten-year notes were trading 13/32 lower in price to yield 3.48 percent, up from 3.43 percent late Monday, while 30-year bonds were 14/32 lower to yield 4.51 percent from 4.48 percent.

(Additional reporting by Karen Brettell)

Bond yields gain as investors fear more hawkish Fed