REFILE-TREASURIES-30-yr improves after month of underperformance

* Long bond gains, correcting part of a month-long decline

* Intermediate-term maturities weaken a bit before supply

* Prospect of resumed Fed purchases restrains selling

(updates throughout, adds comment, changes byline)

By Ellen Freilich

NEW YORK, Oct 22 (BestGrowthStock) – The 30-year U.S. Treasury bond
rallied on Friday, though it remained a wallflower relative to
shorter maturities expected to benefit most from the likely
resumption of Federal Reserve asset purchases next month.

While the 30-year bond rallied four out of five days this
week, the gains only partially reversed its losses over the
last month, leaving its performance still behind the curve
relative to shorter maturities.

That’s because market participants assume the 30-year bond
won’t be on the Fed’s shopping list should the U.S. central
bank re-start measures to support the economy, as it is widely
expected to do in the hope of fostering employment and avoiding
deflation.

The 30-year bond is also the focus of the bond market’s
concerns that the Fed’s renewed attempts to stimulate the
economy could eventually lead to too much inflation.

“In this environment, that’s not a huge concern, but
somewhere down the road, if the economy revives and the Fed
does not unwind its stimulus in a timely manner, people worry
about the prospect of another bubble in some asset class,” said
Tommy Huie, president and chief investment officer of
Milwaukee, Wisconsin-based M&I Investment Management Corp.
advisor to The Marshall Funds, with more than $35 billion in
assets under management.

Bond investors do not like inflation because it erodes the
value of fixed-income securities.

The 30-year bond price (US30YT=RR: ) rose 11/32, its yield
easing to 3.94 percent from 3.96 percent late Thursday, but up
from 3.74 percent a month ago.

In contrast, the benchmark 10-year note (US10YT=RR: )
slipped 4/32, its yield edging up to 2.56 percent from 2.55
percent on Thursday — and unchanged from a month ago.

Shorter maturities, located in the so-called belly of the
curve, have rallied over the last month as additional asset
purchases by the Fed have looked more and more likely.

Yields on two-, three-, five- and seven-year Treasury notes
have all come down over the last month, even if five- and
seven-year yields edged up almost imperceptibly on Friday. The
Treasury will auction more of those securities next week.

The Treasury is selling $109 billion of coupon-bearing
supply next week, including a $10 billion sale of five-year
Treasury Inflation-Protected Securities on Monday.

Traders widely anticipate the U.S. central bank to begin
another round of quantitative easing, dubbed “QE2,” after its
Nov. 2-3 policy meeting. Many think the Fed will focus on
government debt in the five-to-10-year range, whose yields are
linked to mortgage rates and investment benchmarks.

What isn’t certain is whether the Fed’s approach will be
very assertive, or more gradualist.

“Is the market pricing in a ‘shock-and-awe’ or a more
limited, open option? That’s what the market is trying to get
its arms around,” said David Gottlieb, principal at EMF
Financial Products in New York.

In recent days, some Fed officials have expressed their
support for an open-ended, gradual approach to QE2, not a
“shock and awe” one that bond bulls have been hoping for.

St. Louis Fed President James Bullard said on Thursday he
would back Fed purchases of Treasuries in $100 billion
increments meeting-by-meeting if the Fed decides monetary
easing is necessary, but stressed no decision has been made.

Some have estimated that the Fed could buy up to $1.5
trillion in Treasuries, but Bullard and other Fed officials
appear to have tempered those expectations.

(Additional reporting by Richard Leong, Editing by Chizu
Nomiyama)

REFILE-TREASURIES-30-yr improves after month of underperformance