TREASURIES-Bonds slip ahead of 3-year note sale

* Investors, dealers pare bonds before supply
* Europe's woes rein in bond market sell-off
* Three-year supply seen fetching solid demand

By Richard Leong
NEW YORK, June 12 (Reuters) - U.S. Treasuries prices fell on
Tuesday, as investors and dealers pared their government bond
holdings in advance of a three-year note auction, which is part
of this week's $66 billion of federal debt supply.
A higher open on Wall Street stocks exacerbated the selling
in Treasuries especially the 30-year bond, which was down more
than 1 point in early trading.
"While this is a market that is very risk averse, we should
see an auction set-up," said Carl Lantz, chief U.S. interest
rate strategist at Credit Suisse in New York.
Investors and bond dealers typically sell part of their
holdings of Treasuries before an auction to make room for new
supply. Another motivation to sell is to see if they can drive
the bonds down enough in price so that Treasuries will be
cheaper to buy at auction.
The bond market sell-off was tempered by demand for
safe-haven Treasuries on contagion worries about the euro zone
crisis even after a 100 billion euro ($125 billion) bailout of
cash-strapped Spanish banks this past weekend.
Concerns over the rising long-term costs to fix the fiscal
and debt problems in the region stoked selling of all euro zone
sovereign debt including German Bunds, analysts said.
The most pressing issue for investors is this Sunday's Greek
national election and whether a coalition that is against the
terms on its recent EU/IMF bailout may win. Such an outcome
could intensify the risk of Greece's exit from the euro zone,
deepening the euro zone debt crisis, analysts said.

"Whether Greece will fall out of the euro zone membership is
still possible. What is the contagion effect?," said Larry
Milstein, head of government and agency trading at R.W.
Pressprich & Co. in New York.

Benchmark 10-year Treasury notes were last 15/32
lower in price, yielding 1.63 percent, up 4 basis points from
Monday's close. The 10-year yield is 19 basis points above its
historic low set on June 1.
The 30-year bond was last down 1-6/32 to yield
2.75 percent, up 5 basis points from late Monday. The 30-year
yield is 24 basis points above the record low set on June 1.
In "when-issued" trading, traders expected the three-year
note issue for sale later Tuesday at 1 p.m. (1700
GMT) to fetch a yield of 0.3780 percent. This would be above the
record auction low yield of 0.334 percent recorded in Sept 2011.
Analysts and traders anticipate solid demand for the latest
three-year issue as investors sought low-risk assets given the
financial turmoil in Europe.
"I don't see any problems with the digestion of the
three-years," Milstein said.