By Dow Jones Business News, October 23, 2013, 04:15:00 PM EDT
By Min Zeng
Treasury bonds extended their price strength into a second-straight session as speculation grew that the Federal
Reserve may wait until 2014 before dialing back its bond-buying program.
The buying pushed down the benchmark 10-year note's yield below 2.5% for the first time in three months. The yield
touched 2.469% during Wednesday's trading, the lowest since July 22, according to CQG.
In late-afternoon trade, the price rally eased due to some profit taking. The benchmark 10-year Treasury note was 6/32
higher, yielding 2.491%, according to Tradeweb. Bond prices rise when their yields fall.
"There is no clean data in the immediate future which will keep the Fed at bay until 2014," said Jason Evans, co-
founder of hedge fund NineAlpha Capital LP in New York. "Investors have been underexposed to fixed income and get
dragged into the market."
Anthony Cronin, a Treasury bond trader at Societe Generale SA, said the 10-year yield potentially can fall below 2.40%
, maybe even drop to 2.25% in coming months.
Worries that China may tighten monetary policy also encouraged some investors to sell stocks and park cash into safe-
harbor Treasury bonds Wednesday, traders said. A key interest rate of short-term funding in China's banking sector
jumped by more than 0.4 percentage point--the biggest one-day increase since July.
Wednesday's yield decline continued the bond market's comeback from the heavy selloff that started in May and peaked
in early September when the yield briefly topped 3%.
Fears that the Fed would taper its $85 billion monthly buying in Treasurys and mortgage-backed securities as early as
September have been the significant factor pushing investors to cut bond holdings. The worry is that bond yields could
rise further once a main buyer pulls back, leaving bond holders vulnerable to potential capital loss.
But mixed economic releases have dented optimism that the economic growth in the second half of the year would
accelerate--an important condition for the Fed to cut monetary stimulus. Tuesday's smaller-than-forecast 148,000 jobs
growth in September added to conviction by many analysts and traders that the Fed would stand pat in next week's policy
meeting and might not taper in December.
The U.S. fiscal impasse also clouded the growth outlook. Even as a last-minute deal was reached last week to reopen
the federal government and raise the debt ceiling, budget negotiations will come again in early 2014, and some investors
are concerned that the brinkmanship earlier this month might return.
"I view March to be the earliest time frame tapering may occur," said Sean Simko, a fund manager at SEI Investments. "
It wouldn't surprise me if that date gets pushed back further if we start to see softer economic data or similar debt-
ceiling discussions as we just witnessed from the government."
Economists at Goldman Sachs Group Inc. expect the first taper from the Fed in March, though they said if there is
another lengthy debt-ceiling fight that lasts until close to the March policy meeting of the central bank, the tapering
decision likely would be delayed even longer.
Bond bears are still ahead this year despite the recent setback. The 10-year yield is much higher than 1.76% at the
end of 2012. Some traders said if the yield falls to 2.4%, it would be a selling opportunity.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/4% 2-year 99 28/32 flat 0.307% flat
5/8% 3-Year 100 4/32 flat 0.583% flat
1 3/8% 5-year 100 15/32 up 1/32 1.273% -1.0BP
2 1/8% 7-Year 100 25/32 up 4/32 1.879% -2.0BP
2 1/2% 10-year 100 2/32 up 6/32 2.491% -2.1BP
3 5/8% 30-year 100 22/32 up 13/32 3.587% -2.3BP
2-10-Yr Yield Spread: +218.4 BPS Vs +221.3 BPS
Write to Min Zeng at email@example.com
(END) Dow Jones Newswires
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