US bonds climb Fed buybacks, Bernanke eyed

NEW YORK: US Treasury prices rose on Monday in anticipation of Federal Reserve bond repurchases of longer-dated paper this week.

In December, the Fed announced $45 billion in monthly, open-ended purchases of government securities with maturities ranging from four to 30 years in order to maintain downward pressure on longer-term interest rates, support mortgage markets, and help make broader financial conditions more accommodative.

Markets also have their eye on a speech later in the day by Fed Chairman Ben Bernanke.

Investors will focus on anything that will give them a clearer sense of how long the Fed will continue to buy bonds in their continuing efforts to foster economic growth and lower unemployment.

Benchmark US 10-year Treasury notes rose 7/32 in price, their yields easing to 1.85 percent from 1.87 percent on Friday.

Benchmark yields climbed to 8-month highs in the first week of 2013 after minutes to the Fed's December meeting cast doubt on the future of the Fed's asset purchases.

But the absence of new supply until late January should be supportive for Treasury prices, analysts said.

The Fed minutes showed several policymakers "wanted to scale back quantitative easing (QE) well before year-end, but there is no coupon supply until the Treasury sells two-year notes next on January 28," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo/Mitsubishi in New York.

Yields are down from a high of 1.98 percent in early January, but are up from about 1.70 percent at the end of 2012 as investors price in slightly upbeat economic data and the prospect of another round of tough political negotiations in coming weeks to raise the US debt ceiling and let the government pay for expenditures Congress has already enacted.

The Fed's next monetary policy meeting is January 29-30.

"(Interest-rate) policy seems to be on autopilot until the unemployment rate gets to 6.5 percent," Rupkey said. "Once 6.5 percent is reached there will be a discussion and our guess is rates might stay at zero as long as PCE (personal consumption expenditures)inflation is not above 2.5 percent."

Fed official Charles Evans on Monday said the US economy is expected to grow by 2.5 percent in 2013, improving to 3.5 percent growth in 2014. Speaking at the Asian Financial Forum in Hong Kong, Evans forecast the US unemployment rate would be 7.4 percent this year, and about 7 percent in 2014.

While looming talks on the debt ceiling were likely to keep yields from climbing back near 2 percent in coming weeks, some analysts still see them spiking to that level by mid-year once some sort of deal is reached, given the guarded optimism about the economic recovery.

"We are expecting yields to climb up in the Treasury curve over the year. The performance so far this year is what we anticipated for the first four to five months of the year and so the market should take some kind of a break for now," said Pablo Zaragoza, chief rates strategist BBVA in Madrid.

"For mid-year we're expecting 10-year yields at around 1.95 percent. Some volatility could take place but we think 2 percent could be a reference point for mid-year."