Bonds slip as investors trim Fed easing bets

By Richard Leong

NEW YORK (BestGrowthStock) – U.S. government bond prices fell in light trading on Wednesday as investors scaled back bets on more policy easing from the Federal Reserve and booked profits on the prior day’s safe-haven rally.

There was no news that triggered the market pullback, although a weaker dollar and stronger stock index futures provided a less-friendly backdrop for holding U.S. bonds.

After modest gains in overseas markets, Treasuries turned lower, as selling emerged on medium-term notes. This steepened the short-to-medium part of the yield curve, and flattened the long end of the curve.

Bonds, especially intermediate issues, have become expensive in a rally fueled by bets the U.S. central bank will conduct more quantitative easing (QE) after its November 2-3 policy meeting in a bid to stimulate the sluggish economy, analysts said.

“The market has been leaning long with the anticipation of QE2. It’s hard to keep those positions two weeks before the meeting,” said Thomas Roth, executive director of U.S. government trading at Mitsubishi UFJ Securities USA in New York.

Traders have been waiting for details on the form of a second round of quantitative easing from the Fed, which they nicknamed QE2, analysts said.

In recent days, a number of Fed officials, including Chairman Ben Bernanke, have expressed support for more monetary stimulus with the goal of averting deflation.

But several policymakers have cautioned against such a move due to the risk of rising inflation down the road. Two of them — Richmond Fed President Jeffrey Lacker and Philadelphia Fed chief Charles Plosser — will speak publicly Wednesday.

The Fed will release its Beige Book on regional economic conditions at 2 p.m. EDT (1800 GMT) and is seen reinforcing the view of weak U.S. growth.

“It will probably confirm we are in a weak spot,” Roth said.

Also, the Fed is set to buy Treasury Inflation-Protected Securities (TIPS) with proceeds from maturing mortgage securities later Wednesday. This is third TIPS purchase after it bought $360 million in August and $550 million in September.

Since mid-August, the Fed has bought $55 billion in TIPS and regular Treasuries.

The benchmark 10-year note was 6/32 lower, with its yield at 2.51 percent, up from 2.48 percent late Tuesday, while the 30-year bond was flat in price for a yield of 3.92 percent.

The yield spread between 10-year and 30-year debt shrank to 141 basis points from 144 basis points late Tuesday, but the 2-to-10-year part of the yield curve steepened to 213 basis points from 211 on Tuesday.

(Reporting by Richard Leong; editing by Jeffrey Benkoe)

Bonds slip as investors trim Fed easing bets