TREASURIES-Prices up on auction, corporate deal hedging

* Three-year note auction draws good bid

* News on exit strategy, China, boosts confidence

* Hedging related to corporate bond deals lifts prices (Updates prices in late trade)

By Ellen Freilich

NEW YORK, March 9 (Reuters) - U.S. Treasury debt prices rose modestly on Tuesday, aided by hedging before a heavy schedule of corporate bond issuance and encouraged by a well-bid three-year Treasury auction.

Analysts pointed to soothing news on details of the Federal Reserve's exit strategy plans as well as reassurances that China would continue to buy Treasuries.

The head of China's currency reserve management office emphasized that China would continue to buy U.S. Treasury debt. For details, see [ID:nSGE628044]

Treasuries widened gains after the three-year auction.

"The results of the three-year note auction were strong as the auction stopped one basis point short of the 1 p.m. when-issued bid," said John Spinello, chief fixed-income technical strategist at Jefferies & Co. "Buyside participation was quite strong."

U.S. benchmark 10-year Treasury notes US10YT=RR rose 5/32 in price, their yields easing to 3.70 percent from 3.72 percent. Two-year Treasury notes US2YT=RR rose 1/32, their yields easing to 0.88 percent from 0.90 percent.

Traders cited some hedging activity before a heavy schedule of corporate bond issuance as keeping the market steady.

With a surge of new investment-grade bonds expected to come into the market this week, traders expected demand for Treasuries to rise as corporate bond investors swapped some new holdings for U.S. government securities.

"At first glance, whenever you see that you think, 'OK, some of that is going to be swapped and it's going to take Treasuries out of the market,'" said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.

Underwriters sell Treasuries to lock in a certain yield level on the bonds they underwrite. Once the deal prices, they unwind rate-locks and buy back Treasuries.

Klingman said the rallies are fueled by traders who shorted U.S. Treasury debt ahead of the new corporate bond deals and then cover their short positions.

The corporate bond calendar looked busy on Tuesday, following $10 billion in new bond deals on Monday.

Novartis Capital Group on Tuesday announced plans to issue $4 billion in new debt. In all, analysts expect between $25 billion and $30 billion in new corporate bonds to price this week, according to IFR, a Thomson Reuters service.

Also supportive were remarks by Brian Sack, executive vice president at the Federal Reserve Bank of New York, who said on Monday the Fed would likely shrink its balance sheet by letting the assets it bought as part of its response to the financial crisis roll off and mature.

Treasury investors had been worried that the Fed would actively try to sell assets into the market, thereby depressing prices. [ID:nN08197526]

Three-year notes US3YT=RR rose 3/32 in price, their yields falling to 1.38 percent from 1.42 percent on Monday.

Five-year Treasury notes US5YT=RR rose 5/32, their yields slipping to 2.34 percent from 2.37 percent on Monday.

Thirty-year bonds US30YT=RR rose 6/32 in price, their yields slipping to 4.675 percent from 4.69 percent on Monday. (Additional reporting by Emily Flitter; Editing by Leslie Adler)