TREASURIES-Narrow gains scored before 30-year bond auction

NEW YORK Thu Nov 8, 2012 12:13pm EST

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NEW YORK Nov 8 (Reuters) - U.S. Treasuries made modest gains on Thursday before a sale of 30-year securities later in the day, supported by purchases by the Federal Reserve and prospects for continued moderate economic growth and accommodative monetary policy.

As traders positioned for the U.S. Treasury's final refunding auction of the week, a $16 billion sale of 30-year bonds, the 30-year Treasury price erased a small loss and was up 4/32 of a point in price, allowing its yield to ease to 2.84 percent.

The Fed's late morning purchase of $4.893 billion in coupons with maturities ranging from Nov. 15, 2020 to Aug. 15, 2022 was also supportive for Treasuries prices.

The 30-year auction involves "ample uncertainties" especially in the months in which there are quarterly refundings, because the auction size is $3 billion larger than in monthly re-openings, said Cantor Fitzgerald analyst Justin Lederer in New York.

"Overall we expect decent demand for the long end as investors need duration and yield and look for rates to stay low with (President Barack) Obama winning a second term," he said.

A big supporting role for the 30-year Treasury auction is played by the Federal Reserve which is currently buying about 92 percent of new issuance in the long end in its "Operation Twist" monetary stimulus program, Lederer said.

That program is due to end next month, but many market participants believe the Fed will announce more Treasury purchases at the December meeting of the Federal Open Market Committee, the Fed's monetary policy-making arm.

"Since Twist began in October 2011, direct allocations (of 30-year bonds) to direct bidders (in the auction) have been volatile," said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York. "This suggests demand will be key and that the risk of a sloppy auction is elevated."

While U.S. 30-year bonds "have become broadly comfortable with a 25-basis-point trading range since the end of September, a strong reception of today's 30-year supply would likely bring the 2.78 percent yield level under pressure, with a daily close below here paving the way for a test of yield support at 2.69, followed by the September low at 2.65 percent," Cloherty said.

"Conversely, a sloppy auction result would see the range remain intact and augur for a re-test of 2.92 percent, with additional yield resistance located at 2.96 percent thereafter," he said.

"The top of the recent yield range at 3.02 must be taken out to give rise to more enduring bearish price momentum," he said.

In when-issued trade, the 30-year bond to be sold at 1 p.m. EST (1800 GMT) yielded 2.84 percent.

"The 30-year, like every other sector of the curve, has been stuck in an extremely tight range since mid-September," Lederer noted, its yield moving between 2.77 and 3.02 percent.

"We do not expect this range to break significantly in the near term," he said.

Treasures enjoyed a mild safe-haven bid based on uncertainty about the euro zone and U.S. fiscal concerns.

Obama's decisive election victory supported bonds amid expectations for modest economic growth and accommodative, bond-friendly monetary policy, but financial markets are wondering whether the White House and Congress will be able to avoid or minimize the potential damage of a $600 billion package of automatic tax increases and spending cuts, due to take effect early in the new year.

"A Democratic president and Republican House will need to come together to deal with the nation's fiscal health," said Zach Pandl, strategist at Columbia Management in Minneapolis. "Having the election over is a relief, but investors still need to see a favorable resolution of the fiscal cliff before taking a more optimistic view on the U.S. economy," he said.

The uncertainty over the "fiscal cliff" issue continued to lend a little safe-haven support to U.S. Treasuries.

So did concern about the European debt crisis. Greek lawmakers, by a very thin margin, approved an austerity package constructed to get international aid. The coalition government still needs to pass the 2013 budget in a vote expected on Sunday.

Spain showed investors will buy its long-term debt on Thursday with a successful bond auction that completed its 2012 issuance program.

The European Central Bank kept rates on hold and its president, Mario Draghi, sounded downbeat on the euro zone economy and said he was ready to start new purchases of bonds.

News the U.S. trade deficit narrowed in September due to a rise in exports had little influence on bonds. The impact of a drop in new jobless claims to 355,000 in the latest week was also slight.

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