Treasury yields off 17-month lows before Fed starts buying

LONDON (BestGrowthStock) – Ten-year U.S. Treasury yields rose in Europe on Tuesday from 17-month lows hit the previous day as investors stepped out of the market, waiting for the Federal Reserve to kick off the first of a series of bond-buying sprees.

The Federal Reserve on Tuesday will make its first Treasury purchases in a program announced last week that will use funding from maturing mortgage assets to buy U.S. government debt. The Fed will buy maturities in the range of August 2014 to July 2016.

Traders said that unless U.S. data later this session is much weaker than forecast, the focus would remain on how the Fed’s bond-buying operations fare.

The Treasury market is more influenced by weak data at the moment as recent indicators, including Monday’s report on regional business activity, have fanned fears about the outlook for the U.S. economy.

“Asian central banks have not been present buying Treasuries today and that may well be because the Fed is expected to step in. We had the end of a three-day rally yesterday and all shorts got squeezed out. That is why there is now a sharpish selloff going on,” a trader in London said.

“The Fed’s bond purchases will be the main focus today although our worry is that it may not produce much support to a weaker market. That’s because the size of the buying in our view is too little. If they plan $18 billion over a month, that’s $2 billion per auction. Simply not enough,” he added.

U.S. producer price data and housing starts/building permits data for July are both due at 1230 GMT. The Fed’s data on industrial production for the same month is due at 1315 GMT. Core producer prices are forecast to rise by 1.3 percent year-on-year in July while industrial output in July is forecast to rise by 0.5 percent.

“If the data comes in stronger, it may turn heads but won’t change sentiment that the U.S. economy could be heading for a double-dip recession. That is the driver and no single set of data will change that,” the dealer said.

Stephen Lewis, chief economist at Monument Securities agreed. “If the data is stronger people will look for the special factors that distorted it. If the data is weaker, it will confirm the downward trend for the U.S. economy,” he said.

Lewis said that while traders may be unhappy that the Fed is not buying more Treasuries, “it’s probably an amount consistent with what the Fed needs to rebalance its books. Some will argue that the Fed should be doing more than balancing books.”

By 1105 GMT, benchmark 10-year notes yielded 2.6071 percent, up 3.4 basis points from the New York close and above a 17-month low of 2.5626 percent struck on Monday.

Thirty-year notes yielded 3.7237 percent, up 0.7 basis points and giving back the least after a rally led by 30-year T-bonds on Monday. The September T-note future was down 12/32 at 125-27/32.

The spread between the 10- and 30-year Treasury yields tightened to around 111 basis points, about 13 basis points below a record peak near 124 basis points struck last week.

(Reporting by George Matlock; Editing by Susan Fenton)

Treasury yields off 17-month lows before Fed starts buying