Treasury steady after turbulence, market awaits Fed, data

TOKYO (BestGrowthStock) – U.S. Treasury futures steadied on Tuesday, after a turbulent session that took the benchmark bond yield to a six-month high, with retail sales and wholesale prices data awaited to help gauge the outlook for inflation and growth.

The Federal Reserve holds a one-day policy meeting on Tuesday at which officials are expected to assess its latest $600 billion bond-buying program but not signal any shift in its buying intentions, even though a planned extension of tax cuts could provide a boost to the economy.

Treasuries fell sharply in Asian trade on Monday as Japanese investors dumped U.S. government debt on prospects of higher growth and wider deficits, but the market was calmer on Tuesday and the benchmark was below its six-month peak of 3.395 percent.

“It feels like people are out of their weak longs and we’re going to sit here for a while,” said a senior trader at a European bank in Tokyo.

March futures on the 10-year note rose just 0.5/32 to 120-21.5/32, above a six-month low set on Monday.

The market is trying to assess whether the U.S. tax plan means the Fed’s bond buying will not extend beyond its expiry in June, reassess economic growth expectations on the back of improving but uneven data, and gauge what the plan means for inflation and the budget deficit in the longer term.

The interest rate-sensitive two-year note was yielding 0.600 percent, up almost a basis point from late U.S. levels, and the two-year/10-year yield spread inched up to 268 basis points from 269 on Monday, its widest in seven months.

Fed buying helped bonds recover on Monday, after the 10-year yield spiked through chart resistance at 3.37 percent, and some in the market say it may re-emphasize its “low for long” stance on interest rates to try to keep yields in check.

Federal funds futures are pricing in the possibility of a rate hike early in 2012.

The trader expected the 10-year note yield to edge down toward 3.25 percent in the coming days. It was at 3.285 percent on Tuesday, up about half a basis point from late U.S. trade.

It has risen nearly 50 basis points since the start of the month and has climbed steadily since dropping almost to 2.33 percent in October.

On the charts, the next upside target is 3.617 percent, a 76.4 percent retracement of its fall from April to October.

U.S. retail sales are forecast to have grown 0.6 percent in November, down from growth of 1.2 percent in October, according to a Reuters poll of analysts.

The market will be watching for signs of growth but with low inflation — a combination that could see investors cut more positions in low-risk Treasuries.

Retail sales excluding automobiles are expected to have risen by 0.6 percent after a 0.4 percent gain the month before.

Producer prices, excluding food and energy costs, are forecast to have risen by 0.2 percent after a 0.6 percent fall in October.

(Reporting by Charlotte Cooper; Editing by Michael Watson)

Treasury steady after turbulence, market awaits Fed, data