TREASURIES-Prices up as higher yields, Fed hopes draw buyers

* Higher yields, hope for big Fed purchases draw buyers

* $29 bln 7-yr Treasury note auction has solid demand

* Belly of curve outperforms after week of supply

(Adds strategist’s quote, updates prices)

By Chris Reese

NEW YORK, Oct 28 (BestGrowthStock) – A recent rise in yields and
talk of aggressive quantitative easing by the Federal Reserve
drew buyers to U.S. Treasuries on Thursday and bolstered demand
in an auction of seven-year Treasury notes.

The move higher in price comes ahead of next week’s
expected U.S. Federal Reserve announcement on the scope of a
program to buy more assets to help support the economy.

Doubts about the size of the Fed’s next asset purchases
encouraged some price-cutting this week, pushing yields high
enough to draw buyers back into the market.

Some of the doubts appeared to dissipate Thursday amid talk
of eventual Fed purchases of up to $1 trillion.[ID:nN28172214]

The middle, or belly, of the curve outperformed longer
maturities, reversing some of the selling that occurred early
this week ahead of supply.

The Treasury’s auction of $29 billion of seven-year notes
on Thursday afternoon brought a lower yield than expected —
evidence of aggressive bidding for the securities. For auction
details see [ID:nTAR000410].

“With this being the last auction before month-end, and
indeed the last supply point before QE2 next week, we expected
this to be a successful auction and it was,” said John Briggs,
U.S. interest-rate strategist at RBS Securities in Stamford,
Connecticut, adding “the fact that seven years stand to benefit
greatly from additional Fed purchases was an additional support
for the sector.”

Indeed, seven-year notes (US7YT=RR: ) were the strongest
performer on the Treasury curve, gaining 21/32 in price to
yield 1.94 percent, down from 2.04 percent late on Wednesday.
Benchmark 10-year notes (US10YT=RR: ) were 17/32 higher to yield
2.66 percent from 2.72 percent.

The Treasury had already auctioned five-year TIPS, and two-
and five-year notes on Monday, Tuesday and Wednesday,

Broadly speaking, prospects for large-scale purchases by
the Federal Reserve, beginning as soon as next week, supported
bond prices.

The Fed is expected to outline an asset purchase program
after its policy meeting Nov. 2-3, and the market sees several
possible scenarios.

One is for about $500 billion over five months promised,
with hints of more. This scenario has probably been priced into
the market, traders said.

Another is for a more aggressive program, amounting to
asset purchases worth $750 billion to $1 trillion, also with
hints of more, if needed.

A Reuters poll Wednesday found that most leading economists
expect the Fed to buy between $80 billion and $100 billion in
assets per month, with totals ranging widely from $250 billion
to as high as $2 trillion. [ID:nNLLRLE6LL]

“An amount of $500 billion is priced in,” said Chris Diaz,
co-manager of the Global Bond Fund at ING Fixed-Income in
Atlanta, the latter with $110 billion in fixed-income assets
under management in the United States.

“We think the Fed will announce purchases to be made on a
monthly basis, and contingent upon how the economy responds in
terms of the Fed’s dual mandate of achieving full employment
and price stability,” Diaz said.

Diaz said talk of purchases totaling as much as $2 trillion
at one point allowed the bond market to build up its
expectations. If those expectations had solidified, the market
could have been “a little underwhelmed” by what the Fed really
“feels comfortable precommitting to,” he said.

If the Fed’s announcement disappoints expectations built
into the market, interest rates would head up and risk assets
would likely sell off, Diaz said.

“Clearly the rally in the stock market, the depreciation of
the dollar, the rally in U.S. interest rates are all
correlated. This is a reflationary, quantitative easing trade
going on,” he said. “If the Fed disappoints the market, you’d
see a partial reversal of this reflationary trade.”

A government report that U.S. jobless claims fell in the
latest week briefly shrank the Treasury market’s best gains.
(Additional reporting by Ellen Freilich; Editing by Andrew

TREASURIES-Prices up as higher yields, Fed hopes draw buyers