TREASURIES-Yields lower as Treasury sells 7-yr notes to solid demand

Thu Mar 27, 2014 1:50pm EDT

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(Recasts with auction results, adds quotes, updates prices)
    * Treasury sells $29 bln of seven-year notes
    * Spreads between 5-yr, 30-yr yields tightest since 2009
    * Fed buys $4.22 bln notes due 2019

    By Karen Brettell
    NEW YORK, March 27 (Reuters) - U.S. Treasuries held at lower
yields on Thursday after the government sold $29 billion of new
seven-year notes to strong demand, the final sale of $96 billion
in new coupon-bearing supply this week.
    The notes were sold at a high yield of 2.258 percent, more
than a basis point below where they had traded before the
auction.
    Direct bidders, which includes some central banks and large
asset managers, bought 33 percent of the notes, higher than
their average 19 percent. 
    "The recent auctions have shown a particularly strong
investment fund demand both in January and February ... I think
what we saw is continuing investment fund demand in the belly of
the curve," said John Canavan, fixed income analyst at Stone
McCarthy Research Associated in Princeton, New Jersey.
    Investors may have been lured to the debt by the recent rise
in yields, after Federal Reserve Chair Janet Yellen said the
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.
    "Although there has been some correction the last two days
we are still looking at more attractive yields than we had been
seeing and there is some sentiment that the initial response to
the FOMC meeting has run its course," Canavan said.  
    Seven-year notes were last up 1/32 in price to
yield 2.25 percent. The notes' yields have fallen from a
three-month high of 2.34 percent on Monday, but remain higher
than the 2.14 percent area they traded at before Yellen's
comments.
    The spread between yields of five-year notes and thirty-year
bonds narrowed to 179 basis points on Thursday,
its tightest in five years. Intermediate-dated debt has
underperformed longer-dated bonds since Yellen's comments, as
investors adapt to the possibility of earlier rate hikes.
    Demand for Treasuries heading into the quarter's end this
week may also help demand in the auction. Treasuries have been
supported by safe-haven buying spurred by ongoing tensions over
Ukraine, and as U.S. stocks have struggled.
    "There is a bid in Treasuries. Part of it is geopolitical,
and part is stocks," said Lou Brien, market strategist at DRW
Trading in Chicago.
    Yields briefly rose earlier on Thursday after data showed
sturdy growth. The number of Americans filing new claims for
unemployment benefits fell unexpectedly last week to its lowest
in nearly four months, suggesting a strengthening labor market. 
    U.S. economic growth was 2.6 percent in the fourth quarter,
up from the 2.4 percent the Commerce Department estimated last
month, reflecting a stronger pace of consumer spending than
previously estimated. 
    Benchmark 10-year notes were last unchanged in
price to yield 2.70 percent, after edging as high as 2.72
percent immediately after the data.
    The Fed bought $4.22 billion in notes due in 2019 on
Thursday. It will purchase between $1 billion and $1.25 billion
in bonds due from 2036 to 2044 on Friday. 

 (Editing by Bernadette Baum and Nick Zieminski)
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