TREASURIES-Buyers step in, recent selloff seen overdone

* Buyers step in at relatively higher yields

* Analysts see recent sell-off overdone

* Fed buying, euro zone concerns may provide bid to market
(Adds comments, updates prices)

By Karen Brettell

NEW YORK, Dec 17 (BestGrowthStock) – U.S. Treasuries rallied on
Friday as investors took advantage of a recent back-up in
yields to purchase the debt, while some investors and analysts
also took a view that the market has been pricing in too much
economic improvement too fast.

A rapid increase in yields, which began with a sell-off
of positions after the Federal Reserve announced its latest
quantitative easing program in early November and accelerated
last week after President Barack Obama announced new tax cuts,
this week pushed Treasury yields to seven-month highs.

Interest rate markets have been pricing in aggressive
assumptions of economic growth, with Eurodollar futures
implying an interest rate hike by the end of 2011, and
aggressive increases thereafter. The TIPS market has also
reflected high inflation expectations.

The moves, however, contrast with many views that the
economy will improve at a slower and more uneven pace, where
unemployment remains high and inflation creeps up more slowly.

“We think that the back-up was too far too fast,” said
Michael Cloherty, head of U.S. rates strategy at RBC Capital
Markets In New York.

RBC now expects the U.S. economy will grow at a rate of 3
percent in 2011, up from previous estimates of 2 percent.

“Three percent is not fast enough to push the unemployment
rate down quickly,” Cloherty said. “It will remain at
frustratingly high levels for the next couple of years at these
growth rates.”

Recent trading in interest rate futures and swaptions
markets also support the view that rates are oversold, and the
sell-off is nearing an end, analysts at Credit Suisse said in a
report sent on Friday.

The ratio of put and call options on 10-year Treasuries
futures contracts, when adjusted for delta, has dropped below
0.6 times, its lowest in almost two years, Credit Suisse said.

Each time in the past two years that the ratio has fallen
to around this level, rates were close to turning around,
Credit Suisse said.

The swaptions market, where investors buy or sell the
option of entering into an interest rate swap at a future date,
is also giving bullish signs, they said.

It’s now too expensive to bet on further market volatility
in contracts to pay floating interest rate and receive fixed
ones, relative to contracts to pay fixed and receive floating
rates, which suggests the market sell-off may be coming to an
end, they said.

Benchmark 10-year notes (US10YT=RR: ) rose 24/32 in price on
Friday, their yields easing to 3.33 percent from 3.42 percent
late on Thursday.

The Fed also bought $2.030 billion in Treasuries maturing
from August 2028 to May 2040 on Friday, helping the 30-year
bond (US30YT=RR: ) rise 1-27/32 in price, its yield falling to
4.41 percent from 4.53 percent.

The long bond was also likely supported as buyers stepped
in at yields of around 4.5 percent, analysts said.

Federal Reserve bond purchases and continuing uncertainty
over the fiscal health of European nations may also support
U.S. government debt in coming weeks.

The Fed is making double purchases on several days next
week to make up for lost days in the approaching holiday

Monday’s purchases, for example, will include between $7
billion and $9 billion of notes maturing between 2018 and 2020
in addition to $6 billion to $8 billion of debt maturing
between 2014 and 2016.

Moody’s five-notch downgrade of Ireland’s sovereign debt
rating on Friday was also a reminder that the region may remain

“We were likely to have some more noise out of Europe, that
should provide some support to the Treasury market and we think
that there is some more legs in this rally,” said RBC’s
(Editing by James Dalgleish)

TREASURIES-Buyers step in, recent selloff seen overdone