TREASURIES-Prices dip as investors fret over inflation

Wed Feb 2, 2011 12:44pm EST

* Rising commodity prices impacting rate expectations

* Fed buys $2.205 billion of Treasuries

* Egyptian strife supports bonds' safe-haven allure

* ADP Jan private jobs additions higher than expected (Adds trader's
quotes, updates prices)

By Chris Reese

NEW YORK, Feb 2 (Reuters) - U.S. Treasuries eased on
Wednesday as rising commodity prices sparked inflation worries
and investors expressed disappointment over the comparatively
tiny size of the Centralized Reserve's Treasury buying.

Steadily rising oil prices, fueled recently in part by
political unrest in Egypt, were putting difficulty particularly
on the front of the Treasury curve, which is more susceptible
to interest rate expectations.

Price losses were limited but, as the ongoing political
strife in Egypt maintained some of the safe-haven appeal of
U.S. government debt.

"With oil continuing to trade upward, that is increasing
the inflationary concerns," said Mary Ann Hurley, vice
president of fixed-income trading at D.A. Davidson & Co in

Two-year Treasury notes US2YT=RR were trading 4/32 lower
in price to yield 0.68 percent, the highest in over three weeks
and up from 0.61 percent late Tuesday. Fed fund futures
were also trading lower, bringing forward the implied timing of
a U.S. central bank interest rate increase. According to the
futures, the original opportunity of a rate hike is October 2011.

Separately, the Fed on Wednesday bought $2.205 billion of
Treasuries maturing May 2021 through November 2027, an amount
which may have disappointed investors and encouraged promotion of
U.S. government debt.

"It was beyond doubt on the smaller side," Hurley said, "in
this environment we've been seeing even larger buys being
met with poor market greeting," Hurley said.

Treasuries started the day with higher prices after
television scenes of violence in the streets of Egypt reminded
traders of the political uncertainty there. That spurred
worries over possible implications for the global economy and
bolstered the appeal of lower-risk investments like U.S.
government debt.

Those gains were held even after a stronger-than-forecast
rise in U.S. private payrolls in January colored some
expectations for the government's January payrolls report due
Friday. For details see [ID:nN02187589].

But, Treasuries shed gains in the late morning, with
benchmark 10-year Treasury notes US10YT=RR turning negative
to trade 12/32 lower in price to yield 3.49 percent, up from
3.45 percent late Tuesday.

Source: Reuters.Com