TREASURIES-Bonds flat; easing views offset data, earnings

* Fed’s Lockhart says large “QE2” needed to help economy

* Fed’s Evans says more stimulus to fight joblessness

* Some worry over higher long-term inflation from “QE2”

* Solid bank results, housing data reduce some anxiety

* Bonds flat as Fed official remarks mitigate data

(Updates market action, adds quote)

By Richard Leong

NEW YORK, Oct 19 (BestGrowthStock) – U.S. government debt prices
were little changed on Tuesday as several Federal Reserve
officials expressed the need for more policy easing, which
offset solid bank results and less grim housing data.

Traders interpreted remarks from several senior Fed
officials as reassurance that the U.S. central bank will
shortly engage in a second round of asset purchases known as
quantitative easing, dubbed “QE2,” in an effort to stimulate
private investments by holding down long-term interest rates.

The move, which is widely expected after the Fed’s Nov 2-3
policy meeting, is also seen as a bid to avert deflation where
prices spiral lower and hurt an economy like Japan for years.

“Policy-makers are focusing on the price stability side of
the equation,” said Guy LeBas, chief fixed-income strategist
with Janney Montgomery Scott in Philadelphia.

Tuesday’s remarks from Fed officials countered earlier
bond-negative news, as solid quarterly earnings from Bank of
America (BAC.N: ) and Goldman Sachs (GS.N: ) reduced worries over
the effect of renewed foreclosure problems on the sector.
[ID:nN19106691] [ID:nN19113434]

Bank shares have been under selling pressure on their
potential exposure from a massive probe into foreclosure
practices. [ID:nN18274195]

Stronger-than-expected readings on housing starts also
exerted downward pressure on bonds by soothing some concerns
over the toll the still-weak housing market was having on the
economy. Developers broke ground at the fastest rate in five
months in September. [ID:nN18200840]

Analysts said hedging on corporate bond supply has the
Treasury market in a tight trading range.

Separately, China’s rate hike since 2007 spurred chatter
over its future purchases of Treasuries amid U.S. pressure to
further increase its currency flexibility against the dollar.
But analysts said the surprise move was not a factor in the
bond market. For more, see [ID:nSGE69I0HU]

The benchmark 10-year note (US10YT=RR: ) last traded down
2/32 in price to yield 2.52 percent, flat from late Monday,
while the 30-year bond (US30YT=RR: ) was 3/32 lower to yield 3.96
percent, unchanged from late Monday.

QE2’S COSTS, BENEFITS

Since late August, growing bets of more bond purchases from
the U.S. central bank have rallied the Treasuries market,
sending short and intermediate yields to record lows.

But some investors worry that the long-term cost of Fed’s
increased purchases of Treasuries is higher inflation, making
long-dated U.S. government debt less attractive.

The record spread between the yields on 10-year and 30-year
Treasuries and the high volatility of the long bond, are
proxies of investors’ nervousness over QE2 on inflation.

“That’s a forward vote on Fed policy. Longer-term inflation
is going to be a problem,” said Michael Kastner, partner at
Halyard Asset Management in White Plains, New York.

The 50-day volatility average on the 30-year bond is about
30 percent, higher than the 18 percent on the S&P 500 index
(.SPX: ), Kastner said.

Fed officials, while acknowledging the risks of injecting
more stimulus, have said the benefits from QE2 are needed to
bring down high unemployment and to boost economic activity,

Atlanta Fed President Dennis Lockhart on Tuesday told CNBC
television that QE2 has to be large enough to help boost
demand, and securities purchases of $100 billion a month would
be a possibility. See [ID:nN19117919]

At a separate event, Chicago Fed chief Charles Evans said
it would make sense for the Fed to put in place a so-called
price-level target that would have it shoot for above-target
inflation to compensate for falling short of the mark now.

Last Friday, Fed Chairman Ben Bernanke said policymakers
would like to see inflation at about 2 percent, rather than 1
percent or so right now. [ID:nN15187998]

(Reporting by Richard Leong; Editing by Diane Craft)

TREASURIES-Bonds flat; easing views offset data, earnings