NEW YORK: US Treasuries on Wednesday gave back some gains scored this week as traders awaited a five-year note auction and word from the Federal Reserve on the future of its monetary policy.
A government report showing orders for durable goods rose in March evoked only a "subdued" reaction, showing the market was more concerned with "the Fed and the auctions", said David Ader, senior government bond strategist at CRT Capital Group.
Before the Treasury's $35 billion five-year auction, "the belly of the curve (was) the underperformer," he noted.
Following the five-year debt sale, the market will focus on a Fed policy statement due at 12:30 p.m. EDT (1730 GMT) and Fed Chairman Ben Bernanke's news conference at 2:15 p.m. (1915 GMT).
The Fed chief is expected to espouse the cause of monetary accommodation as long as the economy requires it. More hawkish comments could hurt bonds.
"The Fed is trying to walk a very fine line right now," said Julia Coronado, chief economist-North America, BNP Paribas, New York. "The (first-quarter's) economic readings show how fragile the recovery still is ... so you will probably see the Fed speak about an improving economy and acknowledge rising energy prices without sounding too hawkish. The economy still needs the support of the Fed."
That proposition has left the market expecting that even as the Fed approaches the end of its second phase of bond buying (QE2), it will hold on to its portfolio -- and thus its current level of monetary accommodation -- for some time.
The prospect of Congress and the White House agreeing on a fiscal package of spending cuts and tax hikes would also slow economic growth, said Ray Humphrey, senior vice president and senior portfolio manager at Hartford Investment Management Co., with $159.6 billion in assets under management.
"That will keep the Fed involved in their purchase program at least to the end of June and will keep the Fed involved with a significant balance sheet," Humphrey said, referring to the more than $2 trillion the Fed has infused into the economy since the financial crisis. "They are also likely to keep rates low for quite a while."the durable goods report, their yields rising to 3.36 percent from 3.31 percent on Tuesday. Thirty-year Treasury bonds were down 15/32, their yields rising to 4.42 percent from 4.39 percent on Tuesday.
Ahead of the auction, the Treasury market is taking a small rest from its recent bid which had brought yields to one-month lows, said Justin Lederer, Treasury Desk analyst at Cantor, Fitzgerald in New York.
The five-year yield rose above the psychological 2 percent level, Lederer said, attributing the move to "continued fears surrounding European peripherals (most notably Greece) ... and massive short covering as participants (prepared for) this week's supply."
The proximity of the policy statement from the Federal Open Market Committee (FOMC) -- due just an hour after the bidding deadline for the five-year auction -- adds a little more uncertainty to the auction scenario, Lederer said.
"The market should be quiet, but choppy prior to and in the hour after the auction as last minute positions are squared away," he said.
The five-year notes to be sold at 11:30 a.m. EDT (1530 GMT) yielded 2.115 percent in when-issued trade.
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