TREASURIES-Bonds rise as report revives Fed easing bets

* Advisory firm report renews bets on more Fed bond buying

* Bonds erase earlier losses tied partly to profit-taking

* Fed buys $660 million of inflation bonds in operation

* Fed’s Beige Book expected to show sluggish growth
(Recasts first paragraph, updates market action, adds quote)

By Richard Leong

NEW YORK, Oct 20 (BestGrowthStock) – A report heralding further
monetary stimulus from the Federal Reserve on Wednesday revived
buying of U.S. government debt, pushing up prices and
flattening much of the yield curve.

The report from consultants Medley Global Advisors said the
U.S. central bank plans a second round of quantitative easing,
dubbed “QE2”, after its Nov. 2-3 policy meeting. The Fed plans
to buy $500 billion of Treasuries over six months and leave
itself room for more buying, the firm said in the report, a
source told Reuters. For more see [ID:nN20250581].

The ideas in the report were not new but they came at a
time when investors had been reducing bets on QE2 and booking
profits on the prior day’s safe-haven rally fueled by concerns
over mortgage foreclosure problems at some U.S. banks.

“It was not groundbreaking but it did inspire some buying,”
Derrick Wulf, portfolio manager with Dwight Asset Management in
Burlington, Vermont, said of the report.

The benchmark 10-year note (US10YT=RR: ) was up 5/32, wiping
out an earlier 10/32 decline. Its yield last traded at 2.46
percent, down from 2.48 percent late Tuesday.

The 30-year bond (US30YT=RR: ) was up 16/32 for a yield of
3.89 percent, down from 3.91 percent on Tuesday.

The long bond has been the most volatile maturity as
traders speculate on QE2’s likely impact on long-term
inflation. Last week, the 30-year yield touched 4.00 percent
for the first time since early August.

“The 30-year is vulnerable,” Dwight’s Wulf said. “An
aggressive QE2 leaves the risk for higher future inflation.”

The yield spread between 10-year and 30-year debt shrank to
142 basis points from 144 basis points late Tuesday, but the
2-to-10-year part of the curve was steady at 211 basis points.

Before the report Treasuries were a touch lower led by
selling in medium-term notes which steepened the
short-to-medium part of the yield curve and flattened the long
end.

A weaker dollar (.DXY: ) and gains on Wall Street (.SPX: )
exerted early downward pressure on bonds but this was
overshadowed in the wake of the Medley report. [FRX/] [.N]

Bonds, especially intermediate issues, have become
expensive, buoyed by growing bets that the Fed will conduct
more quantitative easing in a bid to stimulate the sluggish
economy, analysts said.

In recent days a number of Fed officials including Chairman
Ben Bernanke have expressed support for more monetary stimulus
to avert the possibility of deflation taking hold.

Several policymakers, however, have cautioned against such
a move due to the risk of rising inflation down the road. Two
— Richmond Fed President Jeffrey Lacker and Philadelphia Fed
chief Charles Plosser — will speak publicly Wednesday. See
[FED/DIARY]

The Fed’s anecdotal Beige Book on regional economic
conditions, due out at 2 p.m. (1800 GMT), is seen reinforcing
the view of weak U.S. growth.

“It will probably confirm we are in a weak spot,” said
Thomas Roth, executive director of U.S. government trading at
Mitsubishi UFJ Securities USA in New York.

The Fed bought $660 million of Treasury Inflation-Protected
Securities with proceeds from maturing mortgage securities, the
third TIPS purchase after it bought $360 million in August and
$550 million in September. [ID:nTAR001274]

Since mid-August, the Fed has bought $55 billion in TIPS
and regular Treasuries. [ID:nN20EDTABL]
(Editing by James Dalgleish)

TREASURIES-Bonds rise as report revives Fed easing bets