TREASURIES-Bonds steady before expected Fed purchases

* Prospective Fed purchases keep bonds mostly steady

* Reluctance to sell when Fed seen primed to buy assets

* Fed’s Beige Book says economy sluggish in recent weeks
(recasts, updates market action, adds quote, changes byline)

By Ellen Freilich

NEW YORK, Oct 20 (BestGrowthStock) – Prospective Federal Reserve
asset purchases kept U.S. government securities prices mostly
steady on Wednesday with investors wary of selling just as the
Federal Reserve is about to buy.

Comments by Fed officials since their last policy meeting
have left the market with no doubt that the U.S. central bank
thinks it must do more to ensure the highest level of
employment compatible with price stability.

This conviction has pushed bond prices higher and yields
lower in recent weeks. On Wednesday, some of the day’s modest
gains deflated in late trade.

“Equity market gains pulled some cash out of the Treasury
market in a late-in-the-day, low-volume trade,” said Kevin
Giddis, president of fixed-income capital markets at Morgan
Keegan in Memphis, Tennessee.

The benchmark 10-year note (US10YT=RR: ), up for part of the
session, ended with a 2/32 point loss. Its yield stood at 2.48
percent, little changed from Tuesday.

Giddis said traders might also have expected the Fed’s
Beige Book, a report on business conditions across the nation,
to paint a more dire picture of the economy than it did.

“That may also have contributing to the selling,” he said.

The Fed’s Beige Book, which will brief Fed policymakers at
their Nov. 2-3 meeting, reported the economy grew sluggishly in
recent weeks, supporting the market’s now well established view
that the Fed will buy more assets to support the economy.

“The economic recovery remains slow and this means the Fed
majority can keep the push on to restart its quantitative
easing policy, buying Treasuries outright, at the November
meeting,” said Chris Rupkey, chief financial economist at Bank
of Tokyo/Mitsubishi UFJ in New York.

To help stop the most severe economic contraction since the
Great Depression from turning into another depression, the Fed
pushed overnight interest rates to zero in December 2008 and
then bought $1.7 trillion in government and mortgage-linked
bonds to offer more support for the economy.

“The 9.6 percent unemployment rate is a big block in the
road to sustainable economic recovery and the Fed is trying to
remove that roadblock,” Rupkey said.

A report from consultants Medley Global Advisors asserting
the Fed’s second round of quantitative easing would entail
buying $500 billion of Treasuries over six months after its
November policy meeting and leave room for more buying,
flattened much of the yield curve. For more see
[ID:nN20250581].

The report’s ideas were not new, but they arrived when
investors had been 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 30-year bond (US30YT=RR: ) rose 11/32, its yield easing
to 3.89 percent 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
141 basis points from 144 basis points late Tuesday, but the
2-to-10-year part of the curve widened to 212 basis points.

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.

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 purchases $55 billion in TIPS
and regular Treasuries. [ID:nN20EDTABL]
(Additional reporting by Richard Leong; Editing by Chizu
Nomiyama)

TREASURIES-Bonds steady before expected Fed purchases