TREASURIES-Rally shows inflation expectations

* 10-year TIPS reopening sees record low auction yield

* Belly of curve boosted further by Fed QE announcement

* 5s/30s yield curve steepens to record wide level

* Inflation-protected supply appetite to be tested
(Updates prices, changes lead)

By Emily Flitter

NEW YORK, Nov 4 (BestGrowthStock) – Inflation expectations drew
investors to TIPS and Treasury securities with maturities in
the middle of the yield curve, where prices rose most robustly
on Thursday, as long bond prices lagged.

Meanwhile, the high yield in a $10 billion sale of reopened
Treasury Inflation-Protected Securities plunged to a record
low.

Prices of Treasury notes with maturities of between three
and 10 years rose, while the spread between the yield on
10-year TIPS and regular 10-year notes narrowed. The price of
30-year Treasury bonds was also higher, but markedly less so
compared with shorter-dated debt.

“Today’s dislocation in the treasury market is a reaction
to the Fed’s decision yesterday to reestablish quantitative
easing,” said Thomas di Galoma, head of fixed income rates
trading at Guggenheim Securities in New York, in a note to
clients.

Di Galoma pointed to the simultaneous widening in the
difference between 30-year bond yields and seven-year note
yields — a phenomenon known as steepening — even as
seven-year yields drew closer to two-year yields in what is
known as a flattening move.

The high yield at Thursday’s TIPS auction, meanwhile, was
0.409 percent, more than 60 basis points below the yield of
1.019 percent at the previous 10-year TIPS auction on Sept. 2,
which was itself a record low. The spread between 10-year TIPS
and regular 10-year notes narrowed to 208 basis points after
the 1 p.m. (1700 GMT) TIPS auction.

Treasury investors are betting that middle-dated yields
will fall as the Federal Reserve begins a new program to buy
$600 billion more in Treasuries by the middle of next year. The
Fed announced the program on Wednesday and reiterated that
economic conditions are likely to warrant exceptionally low
levels for the federal funds rate for an extended period.

The Fed’s strategy is to prevent a slide in inflation from
becoming a deflationary spiral of falling wages, growth and
business activity. Market players say a dramatically steeper
yield curve may be the new norm. Inflation expectations served
to increase demand for TIPS and drive down the 10-year TIPS
auction yield on Thursday.
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To link to a PDF on the Fed’s decision click on:
http://r.reuters.com/cyh73q

Take a Look [ID:nN04140647]

Take a Look [ID:nFEDAHEAD]

Reuters Breakingviews [ID:nLDE6A30RT]
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Treasury prices were also bolstered on Thursday after
claims for U.S. unemployment benefits rose more than expected
in the latest week, dimming expectations for growth in October
U.S. nonfarm payrolls numbers to be released on Friday.

A separate report showed nonfarm productivity rose faster
than expected in the third quarter and unit labor costs
dropped. For details click on [ID:nN04207851].

“The belly (of the yield curve) is a bit better on (jobless
and productivity data), with tens outperforming marginally, but
the news pales versus what we got yesterday,” said David Ader,
head of government bond strategy at CRT Capital Group in
Stamford, Connecticut.

The five-/30-year yield spread widened to a record-wide 303
basis points on Thursday as investors bet the Fed’s fresh round
of quantitative easing would stoke future inflation. That
spread stood at 293 basis points late on Wednesday.

Benchmark 10-year notes (US10YT=RR: ) were trading 26/32
higher in price to yield 2.48 percent, down from 2.57 percent
late Wednesday. Benchmark yields dipped to as low as 2.46
percent, the lowest in two weeks.

Thirty-year bonds (US30YT=RR: ) underperformed, as the Fed
will concentrate its buying on the shorter maturity end of the
curve, and were trading 7/32 higher in price to yield 4.03
percent, down from 4.05 percent.

Evidence of a lack of interest in the long bond could be
seen after call activity swelled in the ProShares UltraShort
20+ Year Treasury (TBT.P: ) fund on Wednesday following the Fed’s
announcement of its purchase program.

The leveraged exchange-traded fund rises when long-term
Treasury bond prices fall and often investors use TBT calls as
a way to place bearish bets on Treasury bond prices.

Two-year Treasury note (US2YT=RR: ) yields dipped to a record
low of 0.32 percent on Thursday, and the spread between
two-year note yields and the Fed’s interest rate target of zero
to 0.25 percent contracted to the narrowest since December
2008, at the height of the global credit crisis.
(Additional reporting by Chris Reese; Editing by James
Dalgleish)

TREASURIES-Rally shows inflation expectations