TREASURIES-Yields fall after strong U.S. 5-year note auction

Wed Mar 26, 2014 2:02pm EDT

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(Recasts; adds auction results, updates prices)
    * Treasury sells $35 bln in five-year notes to strong demand
    * U.S. sells $13 bln two-year floating-rate notes
    * Federal Reserve buys $2.63 bln in notes due 2021-24

    By Karen Brettell
    NEW YORK, March 26 (Reuters) - U.S. Treasury debt prices
extended gains on Wednesday after the government sold $35
billion in new five-year notes amid very strong demand from fund
managers and other investors.
    Indirect bidders bought 50.9 percent of the sale but dealers
took only 25.9 percent of the notes, well below their 47 percent
average for the last four five-year note auctions. The notes
sold at a high yield of 1.715 percent, or about one-and-a-half
basis points lower than where they had traded before the
auction. 
    "It was well received, there was a very low dealer takedown
... it looks like there was a lot of fund demand and demand from
abroad," said Gennadiy Goldberg, an interest rate strategist at
TD Securities in New York.
    The Treasury will sell $29 billion in seven-year notes on
Thursday, the final sale this week of $96 billion in new
coupon-bearing supply. The degree of demand for this sale is
still uncertain, however, as five-year notes have traditionally
had more support from buyers including central banks than have
seven-year notes.
    Short- and intermediate-dated notes have been the worst
performers since Federal Reserve Chair Janet Yellen said last
Wednesday the U.S. central bank could raise interest rates six
months after its current bond-buying program ends, suggesting a
potential rate hike as early as spring 2015.
    This has raised some fears that yields would have to rise
further to attract buyers that are nervous over rising rates. At
the same time, the recent increase in yields is seen as making
the debt more attractive, especially as investors rebalance
their portfolios for quarter-end.
    Five-year notes were last up 8/32 in price to
yield 1.70 percent, down from 1.74 percent earlier on Wednesday.
The yields rose as high as 1.77 percent on Tuesday, the highest
since Jan. 9, and are up from around 1.54 percent before
Yellen's comments a week ago.
    Seven-year notes gained 10/32 in price to yield
2.25 percent, down from 2.32 percent earlier on Wednesday. They
have increased from 2.16 percent before Yellen's comments.
    Traders expect the new seven-year notes may price at yields
of 2.27 percent, according to trading in the "when issued"
market.
    The U.S. benchmark 10-year Treasury note was
last up 12/32 in price to yield 2.70 percent, down from 2.74
percent late on Tuesday.
    Bidding at Wednesday's $13 billion auction of U.S.
floating-rate, two-year government debt was also
the weakest yet since this security was introduced in January.
The bid-to-cover ratio was 4.67, compared with 5.29 in February
and 5.67 in January. Non-primary dealers bought about 37 percent
of the latest supply, down from 45 percent and 47 percent in
February and January, respectively. 
    The yield curve also edged higher as investors continued to
unwind flattening trades that had sent the spread between
five-year note yields and 30-year bond yields to
the narrowest levels in over four years.
    The spread between U.S. and German 10-year debt 
yields was at its widest level since 2006, after a European
Central Bank official on Tuesday said the central bank could
exercise several options to temper euro strength and combat
inflation. ECB governing council member and Bundesbank chief
Jens Weidmann said negative interest rates were an option and
quantitative easing was not out of the question. 
    The gap between U.S. and German 10-year debt yields widened
to 1.188 percentage points early on Wednesday from 1.176
percentage points late Tuesday, according to Reuters data.
    The Fed bought $2.63 billion of notes due from 2021 to 2024
on Wednesday as part of its ongoing purchase program. It will
purchase between $3.75 billion and $4.50 billion in notes due in
2018 and 2019 on Thursday.

 (Additional reporting by Richard Leong; editing by Nick
Zieminski by G Crosse)
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