TREASURIES-US bonds rally as Fed's imminent T-bill purchases ease funding strains

SINGAPORE, Dec 11 (Reuters) - U.S. Treasuries caught a bid on Thursday after the Federal Reserve delivered a less hawkish outlook than some had anticipated and signalled that its imminent buying of Treasury bills could ease the strain on money markets.

The Fed said on Wednesday that purchases will begin on December 12, with an initial round totalling around $40 billion in Treasury bills - a move that was earlier and larger than what investors had expected.

That sent bonds extending a rally in Asia on Thursday, particularly on the short-end, with the two-year U.S. Treasury yield US2YT=RR down roughly four basis points to 3.5278%.

The benchmark 10-year yield US10YT=RR similarly fell more than 4 bps to 4.1235%. Bond yields move inversely to prices.

"The Fed's decision to announce T-bill purchases earlier and in a size greater than the street expected is really an attempt to get ahead of any potential money market flare-up heading into year end. The action adds to the dovish tone," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.

Years of the Fed's bond-portfolio runoff had drained liquidity from the financial system, leaving money markets volatile in recent weeks as premiums on short-term rates spiked.

With the central bank's imminent bond purchases, upward pressure on borrowing rates in the roughly $4 trillion U.S. overnight repurchase agreements (repo) market is expected to ease.

RATES OUTLOOK

At the conclusion of its two-day policy meeting on Wednesday, the Fed also delivered a 25bp cut as expected and remarks from Chair Jerome Powell came in more dovish than what some investors were positioned for.

That reinforced market expectations of two more rate cuts next year - against policymakers' median expectation for a single quarter-percentage-point cut, adding to downward pressure on yields and the dollar. 0#USDIRPR

"We maintain our expectation that the FOMC will lower rates by 25bp twice in 2026, timed in March and June," said Barclays economists in a note.

"We expect a pause at the January meeting, in line with today's communication, as the FOMC assesses the effects of the recent rate cuts."

In other parts of the curve, the five-year U.S. Treasury yield US5YT=RR was down more than 4 bps to 3.7117%. The 30-year yield US30YT=RR eased 3 bps to 4.7667%.