By Dow Jones Business News,
December 23, 2013, 09:45:00 AM EDT
By Min Zeng
U.S. Treasury bond prices pulled back as investors shed holdings to prepare for the Federal Reserve's reduction in its
bond buying starting next month.
In recent trade, the benchmark 10-year note was 4/32 lower in price, yielding 2.903%, according to Tradeweb. When bond
prices fall, their yields rise.
The 10-year yield traded near a three-month high and has risen from 1.78% at the end of last year. The yield is a
benchmark to set long-term borrowing costs for U.S. consumers and businesses. It also affects the funding cost of
foreign governments and companies in selling dollar-denominated bonds.
Traders and analysts caution that bond price and yield moves could be magnified this week as trading thins ahead of
Christmas on Wednesday.
Treasury yields have risen as the U.S. economy has showed sign of slowly gaining steam. As the world's go-to safe
haven, Treasury bonds typically do well when the economy or financial system is under stress.
An improving economy allows the Fed to start winding down, or "taper", its bond buying monetary stimulus, reducing
support for the bond market.
"Investors will be closely watching holiday sales data and the numbers as we begin 2014 to determine if the Fed will
continue to taper at each Fed meeting or will it be forced to stop the tapering and take a break if the data softens
again," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
The central bank announced last week that it would start cutting the pace of its monthly purchases in Treasurys and
mortgage-backed securities by $10 billion to $75 billion a month. The central bank's key tool to supporting economic
growth had sent bond prices higher and kept long-term bond yields near historic lows.
Fed officials suggested that the pace to wind down the stimulus hinges on the health of economic growth.
Analysts said Monday's mixed economic data could give the central bank some breathing room by taking a gradual step in
cutting back bond buying.
Personal spending, reflecting what consumers spend on everything from televisions to healthcare, rose 0.5% in November
from a month earlier, the Commerce Department said Monday. That was the fastest pace since June.
But tepid income growth could limit future gains. The report showed personal income rose a smaller-than-forecast 0.2%
in November after falling 0.1% in October.
Meanwhile, Monday's data continues to show inflation pressure remains stubbornly low. The price index for personal
consumption expenditures, the Fed's preferred gauge for inflation, was flat in November from a month earlier, the second
consecutive month prices went unchanged. From a year earlier, prices were up 0.9% in November, after being up 0.7% in
Core prices, which exclude volatile food and energy costs, rose 0.1% from October and 1.1% from a year prior.
Fed officials have cited tame inflation as a reason to continue to keep the short-term policy rate near zero even as
they are ready to dial back bond buying.
Analysts said contained price pressures could temper the pace of rise in bond yields.
Buyers have stepped in as the 10-year yield approached the 3% threshold in recent days. Friday, the yield touched a
three-month high of 2.964% but has since pulled back.
"It may be hard to get yields over the 3.25% level for an extended period of time without seeing a pick-up in
inflation," said Scott Buchta, head of fixed income strategy at Brean Capital LLC.
Goldman Sachs Group Inc. only expects the 10-year yield to rise to 3.25% at the end of 2014.
Write to Min Zeng at email@example.com
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