TREASURIES-Bonds rise on bargain-hunting, Fed purchase

* Bargain hunters buy long-dated bonds after recent losses

* Fed buys more medium issues from mortgage proceeds

* U.S. home builder sentiment rises for 1st time in 5 mths

* 30Y lags intermediates on idea that it’s not Fed’s focus
(Recasts lead, updates market action, adds new quotes)

By Richard Leong

NEW YORK, Oct 18 (BestGrowthStock) – U.S. Treasuries climbed on
Monday as bargain hunters emerged after recent losses and the
Federal Reserve bought more medium-term notes to maintain ample
cash in the banking system.

Bargain-minded investors moved to the forefront given weak
government debt auctions. The notion the Fed would try to
create inflation hammered the bond market late last week.

The 30-year bond, which is the most vulnerable to a higher
inflation outlook, bounced back after its yield broke above 4
percent for the first time in five weeks on Friday.

“Last week’s move was just overdone,” said Jeff Given,
portfolio manager with MFC Global Investment Management in
Boston. “Now people are taking the other side of the trade.”

Market gains briefly pulled back on a less dismal reading
on U.S. home builder confidence. The National Association of
Home Builders’ index of member sentiment rose for the first
time in five months. For details, see [ID:nN18266842]

The 30-year bond continued to lag five-to-10-year
maturities as remarks from Fed officials supported the idea the
long bond would not be a focus of future policy moves.

“That could leave the 30-year in never-never land,” Given
said.

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]

Thirty-year Treasury bonds (US30YT=RR: ) last traded up 29/32
in price to yield 3.94 percent, down from 3.99 percent late
Friday, while the benchmark 10-year note (US10YT=RR: ) last
traded up 17/32 for a yield of 2.51 percent, lower than late
Friday’s 2.57 percent.

The yield gap between 30-year and 10-year debt held near a
record of 142 basis points.

FED PURCHASES

Traders widely anticipated the U.S. central bank will
launch a second round of quantitative easing, dubbed “QE2,”
after its Nov. 2-3 policy meeting.

Traders had positioned for a possible large-scale purchase
worth as much as $1 trillion, but have scaled back their bets.
More of them now see the Fed taking a gradual approach with
buying more bonds in a bid to stimulate private investments and
to avert deflation.

Until the monetary easing materializes, the Fed will buy
Treasuries as a part of a program aimed at maintaining
liquidity in the banking system. Since August, it has purchased
$55 billion in U.S. government debt using proceeds from
maturing mortgage securities. [ID:nN20EDTABL]

On Monday, the U.S. central bank targeted Treasury issues
that come due from October 2016 to August 2020 — an operation
which analysts said propelled intermediate Treasuries toward
their all-time low yields set last week.

The New York Fed, which buys and sells securities for the
U.S. central bank, said it bought $6.26 billion of Treasuries
that will come due between Oct 2016 to Nov 2017. Earlier this
month, it bought $5.19 billion of these issues. For more, see
[ID:nTAR001272]

The Fed will target other Treasuries in two other
operations later this week.

In addition to the Fed’s purchases and positioning for QE2,
analysts said traders will keep tabs on corporate earnings and
outlooks, especially from banks, given their potential exposure
from a massive probe into foreclosure practices.

Citigroup Inc (C.N: ) posted better-than-expected profits and
said it is looking at mortgage-backed securities sold to
investors to make sure the paperwork was in order. So far, it
has not found any problems. [ID:nN18138072]

Traders will also track clues on QE2 and inflation from
upcoming public appearances from Fed officials. [FED/DIARY]

Analysts expect Treasuries to hold in tight trading ranges
until the Fed actually goes ahead with more easing.
(Reporting by Richard Leong; Editing by Andrew Hay)

TREASURIES-Bonds rise on bargain-hunting, Fed purchase