First QE2 buying fails to lift Treasury prices

Prices of US Treasuries fell on Friday as the first day of heavy purchasing by the Federal Reserve failed to jump-start wider demand for low-yielding government debt.

The Fed bought $7.23 billion in Treasury paper on Friday with maturities of between four and six years under its $600 billion bond-buying program announced last week to stimulate the economy. Prices hit session lows after the Fed completed its purchases, with both seven-year notes and 10-year notes trading a full point lower in price.

"Bears are still in charge," said Lou Brien, market strategist at DRW Trading in Chicago. "They were waiting for the purchase results and saw no surprises. Then they started selling again."

Suvrat Prakash, US interest-rate strategist at BNP Paribas in New York, said traders had been waiting until the Fed buying details came out to execute trades they had already planned for the day.

"A couple of people were holding off on shorting the market until the Fed buyback data came out," he said. "It's just a bit of unwinding of long positions. Whenever there's a bit of bearish momentum and people get flushed out of their positions, you can see it go further when the technicals look weak and a lot of technical analysts are saying that now."

The 10-year note yield is poised for its biggest one-week jump this year, while the 30-year yield could see the largest increase over such a period since June 2009.

The Fed's purchasing plan was meant to push Treasury yields lower but after two months of frenzied speculation on the size and scope of the plan before it was announced the details left investors disappointed and yields began rising instead.

"Volatility is really keeping people to the sidelines," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.

"The price action has become so choppy, so erratic. You can't base it on anything you're seeing."

Volume was high, but some trading desks were understaffed following Thursday's Veterans Day holiday. Analysts also struggled to find a rhythm for the day after conflicting reports over whether the European Union would bail out Ireland as it struggles to control spiraling fiscal troubles.

"I'm actually kind of surprised the short to intermediate end (of the yield curve) is having the reaction that it is today," said Mary Ann Hurley, vice president of fixed income trading at DA Davidson & Co in Seattle.

"We have the Treasury debt buyback and we still have the problems in Europe simmering," Hurley said. "With the holiday yesterday and supply out of the way, the economic data today really second tier, I think a lot of people made it a long weekend."

The latest set of European troubles did not provide the flight-to-quality bid that had often materialized during the flare-up of sovereign debt instability earlier this year.

Ader said many Treasury investors, whose bets that more Fed buying would push yields lower and prices higher had soured during an aggressive, week-long sell-off, weren't sure what to do ahead of the Fed's first round of purchases and so were waiting and watching.

"I think probably the best thing to do is to buy with the Fed and sell with the Treasury," said John Spinello, Treasury bond strategist at Jefferies & Co in New York.

Spinello identified a range for the benchmark 10-year Treasury note yield of between 2.75 and 2.57 per cent.

"I think the yield curve will probably flatten; it got way too steep," he said. "Not necessarily a bull flattener but a bear flattener or maybe a little bit of both. Right now the front end is as weak as it's been for a long time."

Two-year notes US2YT=RR were yielding 0.47 per cent after losing 3/32 in price, having ended on Wednesday at 0.42 per cent.