Bonds steady to higher after successful 7-year sale

NEW YORK (Reuters) - U.S. Treasuries prices were little changed to slightly higher on Thursday, paring losses after comparatively solid demand in an auction of $29 billion of seven-year notes.

Prices had slipped in the morning as traders sold debt to make room for supply from the last Treasury note auction of the week.

"A good auction to end the week," John Briggs, interest-rate strategist at RBS Securities in Stamford, Connecticut, said of the seven-year note sale.

Apart from trades driven by Treasury's sale, the Federal Reserve's purchases of Treasuries on Thursday cast a slightly negative shadow early in the day, analysts said.

The Fed bought $5.79 billion of Treasuries maturing between November 2012 and July 2013 of the $33.56 billion of Treasuries dealers submitted for consideration, the New York Fed said.

Weaker-than-forecast economic data lifted U.S. Treasuries prices from lows early in the session.

New jobless claims rose more than expected in the latest week and the component of the U.S. durable goods report that most closely reflects business investment spending fell 2.5 percent in December, contrary to an expected increase.

Following the seven-year note auction, benchmark 10-year Treasuries, were trading 2/32 higher in price to yield 3.41 percent, down slightly from 3.42 percent late Wednesday.

The Treasury Department said on Thursday that to avoid hitting the U.S. debt ceiling, it would shrink its Supplementary Financing Program, which is money held at the Federal Reserve for emergency lending facilities, to $5 billion from $200 billion.

David Ader, head of U.S. government bond strategy at CRT Capital Group in Stamford, Connecticut, said the Treasury's move could "presage something of a collateral squeeze" that could tend to steepen the yield curve.

"If Treasury cuts issuance, it will be more in bills than coupons," he said.

A cut in Japan's credit rating by Standard & Poor's on Thursday, the first cut in that nation's rating since 2002, appeared to have little market impact outside Japan.

Standard & Poor's lowered Japan's long-term sovereign debt rating by one notch to AA minus, three levels below the highest possible rating.

In the past, markets have not worried much about Japan's high debt because of the country's ample domestic savings and because few foreign investors hold Japanese government bonds.

But this time the ratings move on Japan also pushed credit default swaps on triple-A rated debt higher, with the spread on German CDS reaching its highest level since March 2009 at 63 basis points.

In the thinly-traded sovereign credit default swap market, the five-year cost to insure against a U.S. government default was last quoted at 50.75 basis points, hovering near an 11-month high reached Wednesday.

(Additional reporting by Ellen Freilich; Editing by Padraic Cassidy)