U.S. debt prices rally but supply looms next week

NEW YORK Fri Jun 24, 2011 3:51pm EDT

Traders in the 10-year bond options pit signal orders at the Chicago Board of Trade September 21, 2010. REUTERS/Frank Polich

Traders in the 10-year bond options pit signal orders at the Chicago Board of Trade September 21, 2010.

Credit: Reuters/Frank Polich

NEW YORK (Reuters) - Treasury prices extended their rally on Friday as more money flowed out of European bonds and equities and into safe-haven U.S. debt, but traders said prices could fall next week ahead of scheduled auctions.

The Treasury Department plans to sell $99 billion in new debt on Tuesday, Wednesday and Thursday. Selling ahead of the auctions to lower auction prices and raise yields could overpower the safety bid, which remained strong going into the weekend.

"There's so much uncertainty, even beyond Greece, in Europe that we're getting yields that are low despite the fact that we have nearly $100 billion of twos, fives and sevens to sell next week," said David Coard, head of fixed income sales and trading at Williams Capital in New York.

"I think the street is going to do its level best to get a concession, because the only way these yields are justified is if we continue to have news out of Europe that creates this safe-haven buying. The economy is sluggish but it's not falling out of bed and unless it were falling out of bed there would be no justification for these yields."

Two year notes continued their rally for an 11th straight week, the longest in more than 30 years, coming close during trading on Friday to a record intraday low touched on November 4, 2010 at 0.3200 percent.

Two year notes closed unchanged in price from Thursday and yielding 0.346 percent.

Nervousness about the Greek debt situation potentially becoming "contagious" and affecting the euro zone and global financial system whetted investors' appetite for Treasuries.

"As has been the case lately, domestic economic numbers are playing second fiddle to the events overseas," said Kevin Giddis, president of fixed-income capital markets at Morgan Keegan. "Bonds are strengthening as investors seek 'insurance' from unfavorable developments in Greece over the weekend."

Concerns that the Greek parliament could reject new austerity measures hurt riskier assets in general and helped safe-haven assets like U.S. Treasuries, analysts said.

The Greek parliament is scheduled to vote on the austerity plan on Wednesday and Thursday.

The benchmark 10-year U.S. Treasury note rose 11/32, erasing an earlier loss. Its yield eased to 2.87 percent from 2.91 percent late on Thursday, closing at its lowest point since November 30, 2010.

The three major U.S. stock indexes .DJI.SPX.IXIC, meanwhile, were down around 1 percent each.

In the middle of the maturity curve, the five-year note was up 11/32, its yield slipping to 1.38 percent from 1.46 percent on Thursday.

The Federal Reserve bought $4.578 billion in U.S. Treasuries with maturities ranging from April 15, 2014, to May 15, 2015. The purchases were part of the U.S. central bank's second phase of large-scale asset purchases, known as QE2, intended to facilitate lending and encourage economic growth.

U.S. three-month bills yielded 0.015 percent and six-month bills yielded 0.071 percent.

On the economic data front, the Commerce Department said U.S. durable goods orders rose 1.9 percent after a revised 2.7 percent drop in April. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rebounded to increase 1.6 percent last month after a revised 0.8 percent fall in April.

The annual rate of first-quarter U.S. growth was revised upward to 1.9 percent from a previously estimated 1.8 percent, according to the government's final estimate.

(Additional reporting by Ellen Freilich, Richard Leong and Dan Bases; Editing by James Dalgleish)

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