US bonds erase losses as stocks come off highs

NEW YORK: US Treasuries prices erased modest losses and turned flat on Tuesday as stocks trimmed some gains and investors maintained a steady appetite for safe-haven US government debt.

While riskier assets like stocks and the euro improved, the lingering uncertainty surrounding the Greek debt situation appeared to assure demand for US Treasuries.

The benchmark 10-year US Treasury note, down 4/32 earlier, was unchanged on the day, yielding 1.95 pecent.

A "really pessimistic US and global forecast" from the International Monetary Fund also seemed to argue the case for holding safe-haven assets, said Cary Leahey, managing director and senior economist at Decision Economics in New York.

The IMF said US growth would be "modest relative to historical averages for years to come." It cut its US growth estimates to 1.5 percent for 2011 and 1.8 percent for 2012, from June forecasts of 2.5 percent for 2011 and 2.7 percent for 2012, respectively.

The IMF said US household and business confidence had weakened notably and market volatility had spiked due to worries about the weak economic recovery, a US credit downgrade and market turmoil in Europe.

Meanwhile, the Federal Reserve begins a two-day meeting on Tuesday that is expected to conclude with a decision to further ease monetary policy.

"In light of tepid economic data, including a near stall among both non-farm payrolls and retail sales, we expect policy-makers to adopt a somewhat more negative assessment of the economy as well as pursue additional policy accommodation in Wednesday's FOMC statement," said Joseph LaVorgna, chief economist at Deutsche Bank Securities in New York.

"The Committee is likely to support further easing in the form of some sort of 'Operation Twist'-like maneuver, either active or passive, whereby the Open Market Desk of the New York Fed extends the maturity of its portfolio," he said.

The passive approach to this would be to reinvest maturing securities into longer-dated Treasuries, LaVorgna said.

The active approach would have the Fed selling short-dated securities in addition to those which are naturally maturing and reinvest further out the curve, he said.

LaVorgna said he expected the reinvestment to occur "in the seven- to 10-year range," but said an extension into bonds was also likely.

Whichever approach the Fed takes, the Fed's intent would be to lower long-term interest rates and provide some further, albeit modest, monetary stimulus to the economy, he said.

Policy-makers are also likely to consider cutting interest on reserves (IOR) or expanding policy guidance, LaVorgna said.

Thirty-year bonds were unchanged in price, yielding 3.22 percent. Bond yields fell to 3.176 percent on Monday, marking the lowest since January 2009.

Two-year Treasury notes traded unchanged in price to yield 0.17 percent. The Fed has said it will keep short-term interest rates near zero at least until mid-2013.

Before a second conference call involving Greece, the EU, the IMF, and the ECB on Tuesday, Greek officials said Monday's call with the agencies had been "productive and substantive" and they expected to get an 8-billion-euro ($11 billion) aid tranche it needs to avoid running out of cash next month.

The US government reported a drop in housing starts for August, but a rise in permits to build new housing.

Copyright Reuters, 2011