TREASURIES-Long bond drops on post-auction losses

Fri May 9, 2014 2:45pm EDT

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* Profit-taking seen at long end

* Other maturities mixed (Adds further 30-year bond losses, late prices and comment)

By Michael Connor

NEW YORK, May 9 (Reuters) - U.S. Treasuries ended mixed on Friday despite substantial drag from a drooping 30-year long bond trying to find footing following an unexpectedly costly $16 billion government auction of new 30-year debt.

Yields on 30-year Treasuries, which posted strong returns in recent months amid rumors of steady buying by pension funds, stood at 3.47 percent, reflecting a price decline of 23/32 on Friday.

A week ago, the yields on 30-year bonds touched a low of 3.34 percent that had not been seen since June 19 last year. Price gains in the long bond had cut yields by 60 basis points in 2014 through May 2, according to Thomson Reuters data.

"After yesterday's auction, I think we've had a bursting of a little bubble in the 30-year bond. Pensions were supposedly buying them but we couldn't find any sign of that," said David Keeble, global head of interest rate strategy at Credit Agricole in New York.

Prices were also stung by weakness in British bond markets and shifts in government bond holdings by institutional investors after Thursday's $16 billion auction of long bonds by the U.S. Treasury, according to Keeble.

"There's a little bit of profit-taking," said Kim Rupert, managing director at Action Economics in San Francisco. "The 30-year is near its most expensive for the year, and there's probably overhang from yesterday's auction. That was a little sour."

Thursday's 30-year auction, the last of three this week by the Treasury Department selling $69 billion of new debt, came with a high yield of 3.440 percent. Demand paled compared with recent auctions and suggested some recent buyers had stayed on the sidelines, according to analysts.

"The bid/cover ratio measured just 2.09 in comparison to the six auction average of 2.41 (in fact, May's bid/cover was the lowest since 2011)," Janney Capital Markets analyst Guy LeBas said in a commentary. "It seems that we've finally found a level at which the demand for duration is fading."

That 3.440 percent high yield was more than two basis points over the market level signaled just before the auction and drove selling of 30-year bonds even as other Treasury maturities rose or steadied. The 30-year fell 4/32 in price on Thursday.

On Friday, other Treasuries were mostly little changed or flat in price. Ten-year Treasury notes yielded 2.6179 percent, reflecting a price decline of 4/32.

(Reporting By Michael Connor in New York; Editing by Peter Galloway and Nick Zieminski)

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