U.S. bonds steady at lower levels following auction

NEW YORK (Reuters) - U.S. government debt prices were steady at lower levels on Monday following a $44 billion auction of two-year notes.

The market for Treasuries was thin, with many regular participants absent during the second of two holiday-shortened weeks.

Following the two-year auction, which analysts said drew a modest response given the time of year, prices hewed mostly to earlier levels, with longer-dated notes registering light losses.

The two-year auction was the first of three scheduled for this week. It drew a higher percentage of direct bidders compared with previous two-year auctions, but a smaller percentage of indirect bidders.

Benchmark 10-year Treasury notes were trading 6/32 lower in price to yield 3.83 percent, up from 3.81 percent late on Thursday. The notes reached a five-month high of 3.84 percent earlier on Monday. The two-year note was trading 3/32 lower in price to yield 1.02 percent, up from 0.97 percent late on Thursday.

"You can't expect much in the sense of the follow-through given the time period," said George Goncalves, head of fixed income rates strategy at Cantor Fitzgerald. "At the end of the day you have to put money to work, and you have to raise money. Even if things look relatively cheap compared to recent history you have to wait and restock and get your risk budget," he said.

Many investors would likely wait until the new year to take advantage of lower Treasury prices, Goncalves added.

The two-year auction was the first of three scheduled for this week, amounting to $118 billion in new supply. The Treasury will auction $42 billion of five-year notes on Tuesday and $32 billion of seven-year notes on Wednesday.

With little U.S. economic data due this week, investors were expected to take most of their cues from the auctions. However, positive movement in stocks on Monday added to the pressure on bond prices.

"It is very quiet. There are very few people around, but most of the weakness is supply related, although with equities being up globally that is also hurting bonds," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.

Bonds have been having a tough month, with benchmark yields on track in December for the biggest monthly jump in more than 5-1/2 years, driven in part by some evidence -- including employment and retail sales data -- that an economic recovery is taking hold.

Yields have risen enough that they could be bumping up against technical resistance, several analysts said.

"Leaning bearishly on the market into year-end seems the path of least resistance," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut. He added, though, that "the moves push the market back toward this summer's lows and provide an attractive entry/yield for buyers."

Five-year notes were trading 7/32 lower in price to yield 2.58 percent, up from 2.54 percent late on Thursday, while the 30-year bond was 10/32 lower to yield 4.70 percent, up from 4.68 percent

(Additional reporting by Chris Reese; Editing by Padraic Cassidy)