TREASURIES-U.S. bonds slip as wave of new supply nears

LONDON Mon Feb 11, 2013 6:11am EST

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LONDON Feb 11 (Reuters) - U.S. bond prices slipped in European trading on Monday as dealers looked to make room for $72 billion of Treasuries due to hit the market later this week.

The soft start mirrored early weakness in German bonds and was exaggerated by a lack of Asian participation, where markets were closed for a public holiday.

Treasury futures slipped 5/32 to 131-37/64 while 10-year T-note yields rose 2 basis points to 1.97 percent - both remain within ranges that have held for the past two weeks.

Traders said that with no major economic data due, the fall in prices was being driven by the weight of upcoming supply which begins with a $32 billion sale of three-year debt on Tuesday, followed by 10- and 30-year sales later in the week.

"With Asia out there's been little in the way of flow this morning but what we are seeing is a bit of setting up for the supply on the back of the refunding," a trader said.

With little maturing U.S. debt this week to be reinvested the supply was weighing on prices, but the sales were still expected to attract solid bidding thanks to key budget issues, which remain unresolved.

Investors wary that spending cuts due to take effect on March 1 would hurt the economy - stoking demand for the safety of U.S. Treasuries - would be closely watching President Barack Obama's State of the Union speech on Tuesday.

"What people will really be looking for is not his grand policy plans, but the immediate issue of sequestration ... the market will be looking more anxiously towards Capitol Hill and the White House," said Marc Ostwald, strategist at Monument Securities in London.

Obama has urged Congress to take steps to postpone harsh government spending cuts due to come into effect on March 1.

Financial markets would take any postponement of the spending cuts as a positive, even if not a long-term solution, dampening Treasuries. However, a failure to head off the risk of growth-stifling cutbacks would push jittery investors towards Treasuries, Ostwald said.

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