TREASURIES-U.S. bond prices fall as Fed seen more hawkish

Reuters

(Changes "dovish" to "hawkish" in headline and throughout

story, changes "more" to "less" in Porcelli quote in paragraph

four)

* Fed statement says downside risks have diminished

* Analysts say Fed statement more hawkish than expected

* Treasury sells $29 bln in 7-year notes at high yield of

1.87 pct

* U.S. private job growth slows in October - ADP

By Luciana Lopez

NEW YORK, Oct 30 (Reuters) - Prices for U.S. Treasuries

traded down on Wednesday as Federal Reserve policymakers said

downside risks to the economy had lessened, a more hawkish

observation than markets had expected.

Concluding a two-day meeting, the Fed extended its

$85-billion-per-month bond buying program, also known as

quantitative easing, in a continued bid to prop up the world's

biggest economy.

But analysts noted that the Fed appeared more hawkish than

expected, with policymakers removing a reference to tighter

financial conditions.

"It was much less dovish than was expected, which is why we

saw the reaction in markets," said Tom Porcelli, chief U.S

Economist at RBC Capital Markets in New York.

Treasuries pared early gains to trade lower after the Fed

statement. The benchmark 10-year note fell 5/32 to

yield 2.525 after the statement, compared to a yield of 2.507

percent late Tuesday.

The 30-year bond also gave up early gains to

fall 5/32 in price, yielding 3.630 percent. That compared to a

yield of 3.621 percent late Tuesday.

However, the Fed also nodded to a recent fiscal policy fight

that likely damaged the economy in the fourth-quarter. The

federal government shut down in the first half of October as

Congressional Republicans sought to undermine President Barack

Obama's signature healthcare law as a condition of funding the

government.

Due to that shutdown, "any improvement with the data will be

viewed with skepticism and any disappointing data will be pinned

on the shutdown," said Neil Dutta, head of U.S. economics at

Renaissance Macro Research in New York.

"March is the most likely for them to dial back on the QE

program. The more important question in 2014 for the Fed is at

what point they will adjust their rate guidance."

Recent data signaled the critical labor and housing sectors

had already slowed even before the shutdown in the first half of

October, adding support to views that the Fed won't be ready to

let the economy stand on its own for months yet.

Analysts say the Fed remains frustrated by the persistent

sluggishness in the labor market despite three rounds of

quantitative easing that has tripled the size of its balance

sheet and resulted in almost five years of near-zero interest

rates.

Payroll processor ADP said on Wednesday U.S. companies added

130,000 workers in October, 20,000 fewer than economists had

forecast. Just four months earlier, they expanded their payrolls

by about 190,000.

Some analysts said that, with the Fed staying the course,

Treasuries are likely to remain range bound for awhile yet.

"It would take something dramatic from here, perhaps a much

better than expected holiday season, for rates to go higher,"

said Paul Montaquila, vice president, fixed-income investment

officer, at Bank of the West's capital markets division in San

Francisco.

"We will be in this trading range for quite some time, with

2.5 percent on the 10-year yield being the mean and a range of

about 2.35 percent to 2.75 percent."

In addition, the U.S. Treasury sold $29 billion in

seven-year debt at a high yield of 1.870 percent on Wednesday.

The auction saw a strong bid-to-cover ratio at 2.66,

compared to an average of 2.51 in the last four auctions.

The government sold $32 billion in two-year notes and $35

billion in five-year debt in the previous two days to steady, if

unspectacular, demand.

(Additional reporting by Richard Leong, Ellen Freilich and

Julie Haviv; Editing by Chris Reese)

Rates

View Comments (3)