Prices ease slightly on tepid auction demand

NEW YORK (Reuters) - U.S. Treasuries eased on Wednesday as near-record high yields dulled demand in an auction of five-year notes, although losses were contained by safe-haven bidding based on concerns about the outcome of Europe's debt crisis.

Investors did not have much faith that a two-day European summit starting Thursday would produce any quick solutions to the euro zone's debt problems.

An auction of $35 billion of five-year notes on Wednesday was met with tepid demand, producing the lowest bid-to-cover ratio since June 2011. Treasuries prices edged lower in the wake of the sale.

"The five-year auction saw weak stats all around, as investors seem unwilling to take any views ahead of the EU summit later this week," said George Goncalves, head of U.S. interest rates strategy at Nomura Securities International in New York.

Benchmark 10-year notes were trading 3/32 lower in price to yield 1.64 percent, up from 1.63 percent late Tuesday and not far off a record low of 1.44 percent touched early this month. The 1.64 percent level is near the middle of a range of trade that has dominated since early June.

"The range is tightening. The big issues remain unresolved and will stay that way for months to come," said David Ader, head of government bond strategy at CRT Capital.

The Treasury auctioned $35 billion of two-year notes on Tuesday, and will sell $29 billion of seven-year notes on Thursday.

Outside of the auctions, Europe remained a key concern, its issues arguing for low interest rates for some time to come, investors said.

A two-day European Union meeting begins on Thursday, but expectations about what constructive steps the gathering could take were subdued after German Chancellor Angela Merkel on Tuesday expressed strong opposition to debt sharing, or euro bonds, a strategy supported by France, Italy and Spain.

On Wednesday, Merkel told the lower house of the Bundestag that Germany's resources were finite and said there were no easy or quick solutions to the euro zone's debt crisis.

"The elephant in the room is still Europe," said Wilmer Stith, portfolio manager at Wilmington Broad Market Bond Fund at Wilmington Trust Investment Advisors. Consequently, steady Spanish and Italian yields on Wednesday helped keep U.S. Treasury yields little changed.

Ader said Treasuries prices already reflect the softer tone of U.S. economic data so the "sideways range trade" could continue, subject to the possible influence of "Fedspeak, the Supreme Court, the EU summit, and month-end."

There was little impact from data showing demand for long-lasting U.S. manufactured goods rebounded more than expected.

Slowing global growth suggests the momentum might not be sustained, economists said.

"Europe, the economic slowdown here, and the 'fiscal cliff' in this country suggest we'll be in a low-interest-rate environment for quite some time," Stith said.

(Additional reporting by Ellen Freilich; Editing by James Dalgleish)