* Ten-year yields lowest since July, below 2.50 pct
* Fed seen reducing bond purchases in March 2014 -poll
* U.S. to sell $7 billion in 30-year TIPS Thursday
* Fed issues most test reverse repos in three weeks
By Karen Brettell and Richard Leong
NEW YORK, Oct 23 (Reuters) - U.S. Treasuries yields fell to
their lowest in three months on Wednesday, prompted by more bets
that the Federal Reserve will not pare its bond purchase
stimulus until next year in the aftermath of a disappointing
jobs report on Tuesday.
Buying overnight helped yields fall further, after a rally
on Tuesday and no major data releases scheduled on Wednesday.
The government is catching up on delayed economic data after the
government's 16-day partial shutdown ended a week ago.
Market focus is now largely centered on next week's Fed
policy meeting, where the U.S. central bank is expected to keep
its $85 billion a month bond purchase program unchanged.
"The Fed is kind of handcuffed from doing any tapering, the
consensus is pushing it out to March. The weak (jobs) number
supports it," said Sean Murphy, a Treasuries trader at Societe
Generale in New York.
A Reuters poll conducted on Tuesday showed 9 of 15 U.S.
primary dealers see the Fed starting to reduce bond purchases in
March, with many of them blaming Washington's fiscal impasse for
a "significant" impact on the Fed's timing.
Data over the coming months is likely to be skewed by the
effects of the government shutdown, limiting insight into the
actual state of the economy and to what degree the shutdown and
the fight over raising the debt ceiling may have harmed growth.
"Now you have the threat of slower growth. We have to see
how much economic damage has been done by the government
shutdown," said Jeffrey Rosenberg, chief investment strategist
for fixed income at BlackRock in New York, which manages $3.79
trillion in assets.
Some economists forecast the first partial government
shutdown in 17 years likely shaved about 0.4 percentage point
from the gross domestic product in the fourth quarter.
The yield difference between two-year and 10-year Treasury
yields, which measures investors' growth expectations on the
United States, narrowed to 2.18 percent, the tightest level
since July 22, according to Reuters data.
On average trading volume, benchmark 10-year notes
were last up 7/32 in price to yield 2.485 percent,
the lowest since July 23. The yields have fallen from 3.00
percent on Sept. 5, before the Fed surprised investors by
keeping the size of its bond purchase program unchanged.
They have retraced about half of their increase in reaction
to Fed Chairman Ben Bernanke hinting, back in May, the Fed might
reduce its bond purchases by late this year.
"We are at the precipice of pricing out the May/June
tapering talk," Rosenberg said.
The pullback in yields was also seen in Treasury
Inflation-Protected Securities. The government will add $7
billion to a 30-year TIPS issue originally issued in February at
an auction on Thursday. Traders expected the reopened 30-year
TIPS supply to fetch a yield of 1.331 percent.
On Wednesday, the Fed bought $3.15 billion in notes due 2021
to 2023 on Wednesday as part of its ongoing purchase program.
As for other central bank operations, the Fed borrowed the
most from banks and money market funds in more than three weeks
during the test of its fixed-rate, reverse repurchase agreement
program on Wednesday.
Under the program aimed to reduce cash in the financial
system and to achieve its interest rate objectives, the Fed
borrows cash typically overnight at a fixed interest rate and
backs the loans with the securities it owns.
On Wednesday, banks and money funds lent $15.74 billion to
the Fed via overnight reverse repos at a 0.02 percent interest
rate. This was the most since $58.16 billion on Sept. 30.
The reverse repo rate was competitive with other short-term
market rates. For example, interest rates on some Treasury bills
due in October and November were running at 0.01 percent.