Prices drop after Fed minutes show support for taper

NEW YORK (REUTERS) - US Treasury prices fell on Wednesday as minutes of the Federal Reserve's January meeting showed members supported continued tapering of the central bank's bond-buying program in the absence of a significant change in the economy.

The minutes showed members on the Fed's policy setting committee wanted to affirm that its asset-purchase program would be trimmed in predictable US$10-billion (S$12.6 billion) steps.

The Fed is seen likely to continue paring its monthly purchases as Fed members view much of the recent economic weakness as a temporary phenomenon that is due to unseasonably cold weather.

"It suggests that they see the recent weakness in economic activity as fairly transitory. They don't think this is a permanent trend. Even if we see lower growth in 2014 they will still continue to taper," said Gennadiy Goldberg, an interest rate strategist at TD Securities.

"It puts a bit of upward pressure on interest rates. If there was anyone thinking the Fed would show debate about slowing purchases, it is not there," Goldberg said.

Benchmark 10-year notes fell 6/32 in price to yield 2.74 per cent after the FOMC minutes, erasing earlier price gains, up from 2.71 per cent late on Tuesday. Thirty-year bonds gained 16/32 in price to yield 3.71 per cent, up from 3.68 per cent.

The Fed said in December that it had decided to taper its bond purchases by US$10 billion a month and followed that up last month by announcing another US$10 billion reduction.

The US central bank bought US$1.25 billion in bonds due between February 2036 to August 2043 on Wednesday as part of its ongoing bond purchase program. It will purchase between US$2.25 billion and US$2.75 billion in notes due 2021 to 2024 on Thursday.

Yields on 10-year Treasuries have traded in a range of around 2.65 per cent to 2.80 per cent for the past two weeks, and new signals on the direction of the economy in the wake of the recent weak data are likely needed to break out of the range.

"It has to be some kind of confirmation that the economic slowdown is for real rather than just weather-related. We need a real confirmation of a different change in Fed policy or a different economic landscape where people are confident about the results that are coming out for the market to move dramatically," said Tom Tucci, head of Treasuries trading at CIBC in New York.

US housing starts recorded their biggest drop in almost three years on Wednesday, likely weighed down by harsh weather, but the third month of declines in permits pointed to some underlying weakness in the housing market. Permits to build homes fell 5.4 per cent in January, the largest drop since June.

Investors said that a recent spate of weaker data in the housing and labor markets made the Fed minutes somewhat dated.

They are now looking to data on inflation, jobless claims and manufacturing due on Thursday for a firmer indication of the US economic outlook and the Fed's forward guidance.

US producer prices also rose for a second straight month in January, pushed up by an increase in the cost of goods, but there was little sign of a broad pick-up in inflation pressures at the factory gate.

Tepid inflation may complicate the Federal Reserve's strategy in the intermediate term as it pares its bond purchases and moves closer to raising interest rates from record low levels, analysts said.

The Labor Department said on Wednesday its seasonally adjusted producer price index for final demand increased 0.2 per cent last month, the largest increase since October. It was the first release since the expansion of the index to include services and construction.

Comments