TREASURIES-U.S. bond prices rise before 2-year auction

Tue Mar 26, 2013 12:46pm EDT

Related Topics

* Cyprus concerns persist, stoke safety bids for bonds
    * Mixed data support view of steady but slow U.S. growth
    * Sturdy demand seen for $35 bln in two-year note supply
    * U.S. Fed buys $3.14 bln medium-term government debt


    By Richard Leong
    NEW YORK, March 26 (Reuters) - U.S. government debt prices
rose in light, choppy trading on Tuesday as worries about
Cyprus's banking problems persisted, supporting safe-haven bids
for bonds ahead of the U.S. Treasury's auction of $35 billion in
new two-year notes.
    The Cyprus rescue plan, which averted a collapse of its
banking sector, has spurred speculation about whether the plan
that involves losses to banks' bondholders and large depositors
will become a roadmap for future euro zone bank bailouts. This
raised worries about bank runs in Italy and Spain, whose banking
systems are many times larger than that of Cyprus.
    Concerns about Europe, together with mixed U.S. economic
data, offset earlier selling inspired by stronger Wall Street
stock prices, analysts said. 
    "It's a lot of push-pull today. The market doesn't know what
to do," Sharon Stark, chief fixed income strategist at D.A.
Davidson & Co. in Tampa said of the day's listless trading.
    The latest data on domestic home prices and durable goods
orders supported a notion that the U.S. economic recovery
remained on track, but steeper-than-expected drops in consumer
confidence and new home sales undercut hopes that the pace of
growth was accelerating.
    Benchmark 10-year yields rose from their
two-week lows set last week on diminished fears over Cyprus'
banking system since the island nation obtained a 10 billion
euro ($13 billion) international bailout this past weekend. 
     
     
    Ten-year yields, however, have stayed below 2 percent on
some safe-haven demand for bonds in the wake of comments from
Jeroen Dijsselbloem, the head of the Eurogroup of finance
ministers, who said on Monday that a Cypriot bailout - which
wiped out some senior bank bondholders and will impose big
losses on large depositors - will serve as a model for resolving
euro zone banking problems. 
    He later appeared to backtrack, saying Cyprus was a specific
case with exceptional challenges including vast deposits from
Russian overseas investors, but analysts said this "bail-in"
solution could cause a possible bank run across the euro zone.
 
    Concerns about the impact on the U.S. economy from the euro
zone's debt crisis was compounded by the latest data that showed
a deterioration in consumer confidence and new home sales,
analysts said.
    "The economy is healing but it's a slow process," said Larry
Dyer, chief U.S. interest rate strategist at HSBC Securities USA
in New York. "We seem to be stuck in a very narrow trading
range." Dyer expected the 10-year yield to bounce between 1.85
percent and 2.05 percent in the near term.
    The latest flare-up in the festering euro zone debt crisis,
together with the Federal Reserve's commitment to hold down
interest rates, should feed bids at the two-year auction at 1:00
p.m. (1700 GMT), part of this week's $99 billion in regular
coupon-bearing supply, analysts said.
    In the when-issued market, traders expected the upcoming
two-year note supply to yield 0.2580 percent,
close to the 0.257 percent yield on the two-year issue sold at
the February refunding.
    On the open market, the 10-year Treasury note 
last traded up 3/32 in price for a yield of 1.928 percent, down
1.2 basis points from late on Monday.
    The 30-year bond was 7/32 higher in price,
yielding 3.135 percent, down 1.2 basis points from Monday's
close.
    The U.S. central bank bought $3.142 billion in Treasuries
due in May 2020 to Feb. 2023, which was part of its ongoing bond
purchases in a bid to hold down long-term interest rates to help
the economy.
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