TREASURIES-U.S. debt prices dip before supply

By Ellen Freilich
NEW YORK, June 26 (Reuters) - U.S. Treasuries prices slipped
on Tuesday before an auction of $35 billion in two-year Treasury
notes, but safe-haven flows had erased most of the session's
losses by midday.
Fresh headlines from Europe, this time focused on Cyprus and
Spain, inspired the latest safety bid.
The latest ripple to hit market shores was the European
Central Bank's announcement that Cyprus sovereign bonds would no
longer be eligible collateral for ECB refinancing operations.
Cyprus has become the fifth euro-zone country to seek emergency
funding from Europe. The rescue it needs could cost more than
half the size of its 17.3-billion-euro economy.
Meanwhile, Spain's short-term borrowing costs nearly tripled
at a Tuesday auction, spotlighting the recession mired-country's
precarious finances.
"For most investors, a 10-year Treasury yield of 1.6 percent
is not a reasonable investment, but the safe-haven flows
continue," said William O'Donnell, managing director and head of
U.S. Treasury strategy at RBS in Stamford, Connecticut.
Benchmark 10-year note prices, down 12/32
earlier in the session, were off just 4/32 before midday, their
yields at 1.62 percent, up from 1.61 percent late on Monday, and
near the mid-point of their recent range.
"We are definitely range bound; dips are shallow," O'Donnell
said.
The Federal Reserve's extension of Operation Twist last week
and the prospect of a third phrase of quantitative easing are
"capping rates," he said.
The Fed bought $4.65 billion of Treasuries maturing from
A ugust 2020 to May 2022.
"There is still plenty of demand for paper at all levels of
the capital structure," O'Donnell said. "We had 'buyer strikes'
in December and now the same institutional accounts (who
wouldn't buy in December) are buying the same paper at higher
prices and lower yields."
Data showing U.S. single-family home prices rose for the
third month in a row in April hinted at some recovery in the
U.S. housing market and was slightly negative for Tr easuries.
But un expectedly weak consumer confidence in June was slightly
positive for safe-haven U.S. debt.

2-YEAR TREASURY NOTE AUCTION
Stone & McCarthy Research Associates market analyst John
Canavan said the Treasury's two-year note auction, whose size
has held at $35 billion since October 2010, should pose little
or no challenge to the market.
"The Fed remains committed to keeping rates exceptionally
low through late 2014 so there is little chance of a significant
near-term increase in two-year note yields," he said. "That
should ensure another smooth two-year note auction this month."
The Treasury will sell two-year notes at 1 p.m. (1200 GMT).
It will also sell five-year notes on Wednesday and seven-year
notes on Thursday for a total $99 billion in supply, and raising
$42.916 in new cash.
In when-issued trade, the two-year notes the Treasury will
sell on Tuesday yielded 0.309 percent, the five-year notes for
sale on Wednesday yielded 0.727 percent, and the $29 billion in
seven-year notes to be sold on Thursday yielded 1.106 percent.
The S&P/Case-Shiller 20-city home price index rose 0.7
percent in April, topping economists' forecast for a 0.4 percent
rise. The Conference Board's June consumer confidence index read
62.0, weaker than forecast.
September Bund futures were 37 ticks lower at
141.78, reversing less than half of Monday's rise as other
top-rated issuance weighed on the safe-haven asset.