TREASURIES-Bonds rise, rebound from recent losses

* Bargain hunters buy long-dated bonds after recent losses

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

* 30Y outperforms short-dated issues, lags intermediates

* Fed to buy intermediate issues from mortgage proceeds
(Updates market action, adds quote)

By Richard Leong

NEW YORK, Oct 18 (BestGrowthStock) – U.S. Treasuries climbed on
Monday as bargain hunters emerged after recent losses tied to
last week’s disappointing auctions and on the notion that the
Federal Reserve would try to create inflation.

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.

“This looks like a retracement,” said Jim Vogel, interest
rate strategist at FTN Financial in Memphis, Tennessee. “The
momentum behind the inflation trade kind of faded.”

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]

Early gains were curbed by 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 lagged intermediate
maturities as recent remarks from Fed officials fanned worries
over possible policy actions on inflation.

Thirty-year Treasury bonds (US30YT=RR: ) last traded up 20/32
in price to yield 3.95 percent, down from 3.99 percent late
Friday, while the benchmark 10-year note (US10YT=RR: ) last
traded up 13/32 for a yield of 2.52 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
nearly $49 billion in U.S. government debt using proceeds from
maturing mortgage securities. [ID:nN20EDTABL]

On Monday, the U.S. central bank will target Treasury
issues that come due from October 2016 to August 2020 — an
operation seen supporting these maturities in early trading.

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 track clues on QE2 and inflation from this
week’s bevy of public appearances from Fed officials.

Analysts expect Treasuries to hold in tight trading ranges
until the Fed actually goes ahead with more easing.

“People are not really in a mood to chase a rally,” said
Jim Barrett, senior market strategist at Lind-Waldock in
Chicago.
(Reporting by Richard Leong; editing by Jeffrey Benkoe)

TREASURIES-Bonds rise, rebound from recent losses