TREASURIES-Bonds give back gains to end lower ahead of debt sales

Mon May 5, 2014 3:34pm EDT

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By Michael Connor

NEW YORK, May 5 (Reuters) - U.S. Treasuries fell on Monday after economic data signaled unexpectedly strong growth in the U.S. services sector, surrendering early gains made on a flight to safety spurred by tensions in Ukraine.

Prices for 10-year notes were down 7/32, the first decline in five trading sessions, and were yielding 2.613 percent.

On Friday, the issue yielded as little as 2.57 percent, a three-month trough. Yields on Monday ahead of the Institute for Supply Management data release on the services sector had been near Friday's low.

On Friday, when an unexpectedly strong U.S. payrolls report was undermined by worries about Ukraine, U.S. 30-year bond yields fell as low as 3.34 percent, their lowest level since June 19. But prices retreated 28/32 on Monday and lifted yields to 3.409 percent in New York.

Shorter Treasury issues were flat or little changed in slow early afternoon trading, which was dulled by market holidays in Tokyo and London.

Much trading was driven by positioning by traders ahead of Treasury Department auctions of new debt scheduled for later this week, according to Mary Beth Fisher, head of U.S. interest rates strategy at SG Corporate & Investment Banking.

"We haven't seen a lot of heavy money flows," Fisher said. "But we see people setting up positions going into the auctions. We think all three auctions will go well."

Beginning with a sale on Tuesday of three-year notes, the Treasury will also hold an auction for 10-year notes on Wednesday and another for 30-year bonds on Thursday.

Treasuries had been up earlier on Monday after pro-Russian militants stormed a Ukrainian police station in Odessa on Sunday and freed nearly 70 fellow activists. Pro-Russian rebels shot down a Ukrainian helicopter on Monday.

European stocks were stung by the news, as well as by economic data signaling China's growth was slowing, and slipped in thin trade. Wall Street stocks opened lower, with major indexes off about 0.5 percent, but recovered and rose on optimism generated by the services sector data.

Traders were also readying for testimony before the U.S. Congress on Wednesday and Thursday by Federal Reserve Chair Janet Yellen that may provide clues on what's next for the central bank's massive bond-buying program and on the timing of the interest rate hikes widely expected next year.

"Yellen will be key," Raymond James market strategist Ellis Phifer said. "She has moved markets at other times she's spoken."

Yellen will make few waves that will affect trading substantially, according to U.S. strategist Gennadiy Goldberg at TD Securities.

"Yellen likely (will strike) a relatively dovish tone while maintaining an optimistic outlook on the recovery amid recent signs of improvement," Goldberg said.

"Yellen will likely attempt to downplay any suggestions that the Fed would hike faster than anticipated following last week's stronger payroll report, stressing that substantial slack in the economy and contained price pressures will leave the Fed on hold for some time to come," he said in a written commentary. (Reporting By Michael Connor in New York; Editing by Chizu Nomiyama and Peter Galloway)

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