Losses pared in Europe ahead of Fed

LONDON: US Treasuries trimmed losses in volatile trade in Europe on Tuesday as equities resumed their slide and investors awaited a Federal Reserve meeting that is under growing pressure to take action to calm financial markets.

While analysts think a further round of quantitative easing is unlikely from the policy meeting later in the day, markets are likely to be disappointed if the Fed appears to have no answers.

Investors have dumped equities and sought a safe-haven in Treasuries after Standard and Poor's stripped the US of its triple-A rating on Friday, fuelling anxiety about the world's largest economy and global growth prospects.

Benchmark 10-year Treasury yields were almost 6 basis points higher at 2.38 percent, down from session highs of 2.43 percent but still off the day's best levels which saw yields hit 2-1/2 year lows of 2.2696 percent. T-Note futures were 6/32 lower at 128-13/32.

"There's some nervousness the Fed could pull a rabbit out of the hat so there's some reluctance to aggressively short equities and buy Treasuries and we've seen a bit of a correction," said Nick Stamenkovic, rate strategist at RIA Capital Markets.

"But if they come out with no more than a bland statement we'll be looking at another risk off day and 10-year Treasury yields will head towards 2 percent."

The Fed could suggest it will revise down its growth forecasts, the first step it is leaning towards further policy accomodation.

It could also begin reinvesting proceeds of maturing bonds in its portfolio into longer-dated maturities, putting downwards pressure on long-term borrowing costs.

The Treasury will sell $32 billion in three-year notes on Tuesday, $24 billion in 10-year notes on Wednesday, and $16 billion in 30-year bonds on Thursday."

"If the Fed does move to extend the portfolio duration then this week's 10- and 30-year sales are going to go extremely well," said a trader.

US stock futures pointed to a mixed open on Wall Street after the worst sell-off since December 2008 on Monday. European shares were down almost 2 percent.

Copyright Reuters, 2011