The US labor market, while improving, remains fragile with job growth running below the pace seen in prior economic recoveries. This might cause the FOMC to begin tapering by a modest $10 billion to $15 billion, analysts said. "The jobs market continues to grow, but at a pace that is less than ideal. Nonetheless, all indications are that the Fed is poised to announce tomorrow that they will begin to pare back their bond purchases," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan. Government data showing inflation in check also supported bids for longer-dated issues. Rising inflation erodes bond values in the long run.
Moreover, some bets that the Fed might delay tapering until later this year helped lift bond prices, analysts said. "The risk is skewed on a dovish outcome," said Anthony Valeri, fixed income strategist at LPL Financial in San Diego. "There's a chance they (the Fed) might not do anything at all. That'll be positive for the bond market." However, gains on Wall Street stocks and weaker German Bund prices kept a lid on bids for Treasuries, analysts said.
Benchmark 10-year Treasury notes were trading 3/32 higher in price with a yield of 2.858 percent, down from 2.862 percent late on Monday, while two-year notes were little changed in price, yielding 0.384 percent. The 30-year bond was up 11/32 in price with a yield of 3.848 percent, down from 3.863 percent late Monday. Long-dated maturities were buoyed by the Fed's $1.47 billion purchases of Treasuries due February 2036 through August 2043 on Tuesday, which were part of its planned $45 billion of Treasuries purchases in September.
Treasury yields held near their lowest levels so far in September after falling on Monday in the wake of news that Lawrence Summers, a former Treasury secretary and former top economic aide to President Barack Obama, withdrew from consideration as Federal Reserve chairman. The news on Sunday eased fears of more aggressive Fed policy tightening if he were in charge of overseeing the monetary policy of the world's biggest economy.