Prices underpinned by Europe worries ahead of Fed

NEW YORK: US Treasury debt prices held steady on Wednesday as markets waited for an afternoon statement from the Federal Reserve, one expected to indicate the central bank would rebalance its portfolio in favor of longer-dated securities to keep long-term interest rates low.

Fresh developments in the European debt crisis seemed to be neutral for safe-haven US government debt. Greece is expected to outline more austerity measures to get a loan it needs to avoid a cash crunch next month, but anti-austerity strikes by Greek workers are called for October 5 and 19.

Anticipation of a Fed decision to ease monetary policy further has made investors extremely reluctant to sell Treasuries, at least ahead of the announcement.

In early dealings, benchmark 10-year Treasury notes were unchanged, yielding 1.94 percent.

Should the Fed's announcement be less aggressive than the market anticipates, some selling could ensue, traders said.

The Fed could gradually weight its portfolio toward longer-dated securities in two ways: by buying longer-dated bonds with proceeds from maturing securities or by more actively selling short-dated notes to buy longer-dated bonds.

The Fed could also offer more policy guidance on the fed funds rate or the size of Fed's balance sheet, said Joseph LaVorgna, chief US economist at Deutsche Bank Securities.

While the current guidance explicitly applies to the level of the fed funds rate, the Fed could enhance that guidance by linking the funds rate to various thresholds of unemployment and inflation; or they could also apply some version of the "extended period" language to the size of the Fed's balance sheet, LaVorgna said.

Markets do not expect the Fed to expand its balance sheet through additional quantitative easing at this time.

Copyright Reuters, 2011