TREASURIES-Prices slip before auctions as durables orders cheer

Mon Jan 28, 2013 10:40am EST

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By Luciana Lopez

NEW YORK Jan 28 (Reuters) - U.S. Treasuries prices dropped on Monday after a gauge of planned U.S. business spending rose in December and investors pushed for price concessions ahead of a debt auction later in the day.

The Commerce Department said on Monday that non-defense capital goods orders excluding aircraft, a closely watched proxy for investment plans, edged higher by 0.2 percent where the market had expected a small drop.

"Net-net this report actually winds up being modestly better from a GDP perspective," said Tom Porcelli, chief U.S. economist at RBC Global Markets in New York.

But he cautioned that milestones later in the week - including a Federal Reserve policy meeting and key U.S. jobs data - could keep investors wary.

"You're not going to want to be a hero here on Monday, not with two major events still ahead of us," Porcelli said.

However, data showing contracts to buy previously owned U.S. homes unexpectedly fell in December took the edge off losses.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed last month, dropped 4.3 percent to 101.7.

The benchmark 10-year note was last trading off 8/32 to yield 1.976 percent. That yield pierced 2 percent earlier in the session for the first time since last April.

The 30-year bond was last off 12/32 to yield 3.152 percent. Analysts at RBS said the support could lie around the 3.15 percent level.

The market is also bracing for $99 billion worth of bond sales by the Treasury this week.

The Treasury will kick off this week's supply with $35 billion in two-year notes on Monday, then sell $35 billion in five-year notes on Tuesday and $29 billion in seven-year notes on Wednesday.

Two-year notes were last trading 1/32 down on the day to yield 0.284 percent, having fallen below their German counterparts for the first time in 13 months on Friday.

On Wednesday the Federal Reserve caps a two-day policy meeting. The statement will be scrutinized for signs the central bank could end its latest bond purchase program this year.

Minutes from the Fed's December meeting, released on Jan. 3, showed that some voting members of the Fed's policy committee opposed continuing bond buybacks, sparking speculation that the central bank may end its latest round of quantitative easing before year-end.

On Friday, the Labor Department's monthly non-farm payrolls data could help clarify the state of the U.S. jobs market, which policymakers have said is a key gauge of the recovery in the world's biggest economy.

"Policy seems to be on autopilot until the unemployment rate gets to 6.5 percent," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Treasuries sold off last week partly on news that European banks planned to repay more emergency loans than expected, suggesting the region's banking sector was on the mend and cooling demand for low risk debt.

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