CORRECTED – TREASURIES-Bonds fall as traders unwind more QE2 bets

(Corrects 8th paragraph to read “On Monday” instead of
Tuesday; clarifies that Fed to buy a total of $105 billion in
government debt over nearly every trading session through
mid-December.)

* QE2 trading close-outs continue to cause market weakness

* Bonds off lows despite unexpectedly strong retail data

* Bearish technicals may continue to dominate

* Fed buys $7.9 bln medium-term notes in QE2 purchase
(Updates market action, adds quote, changes byline)

By Karen Brettell

NEW YORK, Nov 15 (BestGrowthStock) – U.S. Treasuries fell on Monday
as dealers and investors closed out more bets tied to the
Federal Reserve $600 billion bond purchase program, known as
QE2.

Republican criticism of QE2 and ongoing concerns over
Ireland and other European peripheral nations added to market
pessimism, unleashing a wave of selling that pushed benchmark
yields to their highest since early August.

“It seems like the overnight trade is very similar to what
was occurring on Friday, which was essentially QE2 unwinds,”
said John Briggs, U.S. interest-rate strategist at RBS
Securities in Stamford, Connecticut.

Treasury prices dipped across maturities, led by weakness
in 10-year notes (US10YT=RR: ), which dropped 10/32 in price for
a yield of 2.83 percent, according to Reuters data.

Analysts, however, said the market weakness appears to be
related to technical factors, as investors who took long bond
positions ahead of the Fed’s announcement close out trades.

Bearish chart signals with yields breaching a series of
technical supports since last week also overshadowed Monday’s
mixed data on retail sales and regional factory activity, which
suggested a sluggish U.S. recovery. For more, see
[ID:nLDE6AE1RH]

Treasuries have weakened dramatically in volatile trade
since the Fed’s QE2 announcement on Nov. 3.

On Monday, the U.S. central bank bought $7.9 billion in
medium-term Treasuries. It is scheduled to buy a total of $105
billion in government debt over nearly every trading session
through mid-December.

Mounting criticism of the program, which began on Friday,
by Republican politicians and some economists has also added
uncertainty to markets as investors speculate over whether
politicians will make changes to the Fed’s mandate. Fears that
Ireland’s debt woes will spread to more countries, including
Portugal, are also adding a negative tone to markets.

Bonds pared losses on Monday, however, after government
figures showed total sales at U.S. retailers rose 1.2 percent
in October, their largest gain in seven months. This data
overshadowed a New York Federal Reserve report showing regional
manufacturing activity fell in November.

“Treasuries have rallied off the lows on pretty good buying
across all sectors, which makes it seem like liquidation
pressure at least for the moment is abating,” RBS’s Briggs
added.

Kevin Flanagan, chief fixed-income strategist at Morgan
Stanley Smith Barney in New York, said the bond market had
discounted a lot of fear of a double-dip recession and “what
we’re finding out is that the economy might have picked up some
momentum from what we saw in the third quarter.

“If the economy does show some improved results going
forward and that gets combined with the Fed’s QE2 commitment,
you do raise some inflationary concerns,” he said, referring to
the Fed’s latest phase of large-scale asset purchases.

If the economic recovery gains traction, that would make
stocks, corporate bonds and other riskier assets more appealing
to investors than safe-haven Treasuries.

The paring back of early losses in spite of the
stronger-than-expected retail sales data hinted that the
unwinding of QE2 positions may be coming to an end.

“The market is trading better despite retail sales being
better than expected, which adds into my thought that maybe
we’ve finished with this position liquidation,” said RBS’
Briggs.

Technical factors may continue to dominate trading patterns
as the Fed continues its bond purchases.

“Our view is that this was a very crowded trade with a lot
of weak hands,” said Igor Cashyn, Treasury and TIPS analyst at
Morgan Stanley. “The theme is still that the Fed is still
printing money and they are expanding their balance sheet and
absorbing the supply.”
(Editing by Dan Grebler)

CORRECTED – TREASURIES-Bonds fall as traders unwind more QE2 bets