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TREASURIES-Yields drop as Fed's Powell says it's too early to talk about tapering

 (Adds context to Powell's comments, updates prices)
    By Karen Brettell
    NEW YORK, April 28 (Reuters) - U.S. Treasury yields fell on
Wednesday after Federal Reserve Chairman Jerome Powell said now
is not the time to discuss tapering bond purchases as the
economy is still far from meeting the U.S. central bank's
employment and inflation goals.
    Analysts see the Fed as likely to begin hinting toward a
taper announcement in the coming months in order to prepare the
market for a reduction in bond purchases that could begin later
this year.
    But Powell "made it pretty clear that they are a fairly long
way away from tapering," said Tom di Galoma, a managing director
at Seaport Global Holdings in New York. "I think the Fed is
still quite unsure of how the economy is going to be six months
from here."
    Benchmark 10-year yields dropped to 1.609%, from
a two-week high of 1.661%, after Powell's comments at the end of
the Fed's two-day meeting.
    Economic data is showing strong growth as businesses reopen
from COVID-related shutdowns, but it is not clear that the
improvement will continue for more than a few months.
    Gross Domestic Product data on Thursday is expected to show
strong growth in the first quarter, while next week's employment
data for April should also show an improving labor market.
    The Fed also faces a challenge in reducing support for bonds
as supply is likely to continue to increase. U.S. President Joe
Biden is launching new spending programs and it will take time
to raise any new taxes designed to pay for them.
    "With all the money that is being spent ... it puts the Fed
in a very difficult position to taper," di Galoma said.
    Biden will address Congress later on Wednesday on his plans
to spend $1.5 trillion on childcare and college education and
raise taxes on wealthy Americans to pay for it. That is on top
of a $2 trillion jobs-and-infrastructure plan to be paid for by
raising taxes on U.S. companies.
    The Fed also acknowledged increasing inflation in its
meeting statement, but characterized the price pressures as
transitory, as it held interest rates and its monthly
bond-buying program steady.
    Some market participants are asking whether inflation
increases could be more permanent.
    "It's just hard to know what transitory is," said Patrick
Leary, chief market strategist and senior trader at Incapital in
Minneapolis. 
    "I think the market is going to get impatient about the
level of inflation and how long it might last, and it might be
perceived by the market that that inflation is not transitory,
causing a little bit of a revolt, so to speak, in the bond
market," Leary added.
    Inflation expectations hit eight-year highs on Wednesday
with breakeven rates on 10-year Treasury Inflation-Protected
Securities pricing in average annual inflation of
2.43% for the next decade.
    Overnight repo rates fell to zero after the Fed
left the interest it pays on excess reserves (IOER) unchanged.
The repo rate has intermittently traded in negative territory in
the past few months as short-dated supply falls.
    The Fed is seen as likely to hike IOER if the federal funds
rate falls below five basis points, from its current
seven basis points.

      April 28 Wednesday 4:18PM New York / 2018 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.02         0.0203    0.005
 Six-month bills               0.035        0.0355    0.001
 Two-year note                 99-235/256   0.1661    -0.014
 Three-year note               100-30/256   0.3352    -0.021
 Five-year note                99-126/256   0.854     -0.024
 Seven-year note               99-168/256   1.3015    -0.020
 10-year note                  95-160/256   1.6094    -0.013
 20-year bond                  95-52/256    2.1744    -0.006
 30-year bond                  91-28/256    2.2881    -0.005
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        11.25         0.50    
 spread                                               
 U.S. 3-year dollar swap        13.75         0.50    
 spread                                               
 U.S. 5-year dollar swap         8.75         1.50    
 spread                                               
 U.S. 10-year dollar swap       -0.25         0.75    
 spread                                               
 U.S. 30-year dollar swap      -26.75         0.75    
 spread (Reporting by Karen Brettell; Editing by Will Dunham and Sonya
Hepinstall)
  
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