TREASURIES-Flattening trade pauses before two-year note sale

Tue Mar 25, 2014 11:20am EDT

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(Recasts, adds quote, updates prices)
    * Long-dated debt underperforms as flattening trades pause
    * Treasury to sell $32 bln of two-year notes
    * Fed buys $1.15 bln of bonds due 2036-2044

    By Karen Brettell
    NEW YORK, March 25 (Reuters) - U.S. Treasuries investors
pulled back on bets that the Treasuries yield curve will
continue to flatten on Tuesday as they prepared for $96 billion
in new short- and intermediate-dated debt this week, beginning
with a $32 billion sale of two-year notes.
    Two-year and five-year notes have been the worst performers
since Federal Reserve Chair Janet Yellen said last Wednesday
that the U.S. central bank could raise interest rates six months
after its current bond-buying program ends, suggesting a
potential rate hike could happen as early as spring of 2015.
    Traders now expect that Tuesday's auction of two-year notes
will price at yields of around 0.47 percent, likely drawing in
new buyers. The yields fell to 0.44 percent in the secondary
market, after jumping from around 0.34 percent before Yellen's
remarks last week. 
    "There is a reversal of some of the flattening trade that
was taking place. ... The belly of the curve got as cheap as it
was going to get," said Thomas di Galoma, head of fixed income
rates at ED&F MAN Capital Markets in New York.
    The Treasury will also sell $35 billion in five-year notes
on Wednesday and $29 billion in seven-year notes on Thursday, in
addition to $13 billion in reopened two-year floating rate notes
on Wednesday.
    Demand for low-risk U.S. government debt before quarter-end
is seen as likely to help demand in the auctions. 
    Investors were also focused on assessing data this week for
signs about the strength of the economy.
    "We've moved a lot since Yellen's press conference last
Wednesday. The flattener is a crowded trade; you are seeing
people taking off some positions for event risk," said Charles
Comiskey, head of Treasuries trading at Bank of Nova Scotia in
New York.
    On Tuesday, the Commerce Department reported that sales of
new U.S. single-family homes hit a five-month low in February,
but private-sector data showing consumer confidence surged to a
six-year high in March suggested the economy was regaining
momentum after being held back by severe weather.
 
    Other major economic releases this week include gross
domestic product for the fourth quarter, which will be released
on Thursday.
    Five-year note yields dropped to 1.72 percent on
Tuesday, after increasing to 1.77 percent on Monday, the highest
level since Jan. 9.
    Benchmark 10-year notes fell 3/32 in price to
yield 2.76 percent, up from 2.74 percent late on Monday, and
30-year bonds dropped 15/32 in price to yield 3.59
percent, down from 3.57 percent.
    One large flattener trade was seen in U.S. bond futures on
the Chicago Board of Trade on Tuesday in spite of the general
trend. At 3:05 a.m. (0805 GMT), 9,200 contracts of U.S. two-year
Treasury futures traded at 109-22/32 while 5,200
contracts of 10-year bond futures traded at 123-17/32.
    The Fed bought $1.15 billion in bonds due from 2036 to 2044
on Tuesday as part of its ongoing purchase program.

 (Additional reporting by Richard Leong; Editing by Chizu
Nomiyama and Leslie Adler)
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