TREASURIES-U.S. yields slip to 3-month lows as Fed tapering seen delayed

Reuters

* 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.

Rates

View Comments (4)