TREASURIES-Yields slump; 10-year slides to near 11-month low

Wed May 28, 2014 4:15pm EDT

(Adds comment, adds auction results, updates prices)

* U.S. 30-year bond yields also fall, near 12-month lows

* German Bund yields down on the day, weigh on Treasury yields

* Month-end buying continues

By Gertrude Chavez-Dreyfuss

NEW YORK, May 28 (Reuters) - Yields on benchmark U.S. 10-year Treasury notes dropped to their lowest in nearly 11 months on Wednesday, undermined by falls in the German bond market following weak data and more month-end buying from institutional investors.

German 10-year Bund yields were down on Wednesday at 1.337 percent. Yields fell after an unexpected increase in German unemployment and a deceleration in the euro zone money supply. The data reinforced expectations that the European Central Bank will introduce further stimulus at next month's meeting.

The rally in Bunds spilled over into U.S. Treasuries, which saw 10-year note yields tumble to their lowest since early July. U.S. 30-year bond yields also fell, to near 12-month lows.

Buying by institutional investors for month-end extensions has also boosted the market, especially as there were new U.S. 10-year note and 30-year bond issues this month.

"The month-end extensions are part of the Treasury rally and the word is it's larger than usual," said Jeffrey Young, interest rate strategist at Nomura Securities in New York.

According to traders, the Barclays' Treasury index is estimated to extend out 0.125 years, which is the highest since March 2011. One fixed-income analyst said the normal extension is between 0.05-0.08 years.

In late trading, prices on 30-year Treasury bonds were up more than a point to yield 3.290 percent, from 3.364 percent late Tuesday. U.S. 30-year yields hit a low of 3.286 percent, the lowest since around mid-June last year.

Benchmark 10-year U.S. Treasury notes were up 22/32 in price to yield 2.439 percent, from 2.518 percent on Tuesday. Yields touched a low of 2.434 percent, their weakest level since early July 2013.

Earlier in the session, German unemployment data showed its strongest monthly rise in over five years in May to 2.905 million jobless on a seasonally-adjusted basis. That caused a rally in Bunds that ultimately boosted Treasuries

"There's still some global weakness that foreign investors are concerned about and that's why we're seeing foreign interest in our bond market," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas City. "The longer this persists, the more concerned we should be."

Meanwhile, Treasury's 5-year auction was fairly decent, especially given Wednesday's rally in the market and also the fact that it competed directly with the $13 bln 2-year floating rate notes.

The note's high yield came slightly above the bids just before the deadline, stopping at 1.513 percent. There were more than $95.6 bln in bids for a 2.73 cover, a bit below last month's 2.79, but a little above the 2.65 average. Indirect bidders, which includes foreign central banks, accepted 50.4 percent, better than April's 44.9 percent. (Editing by Chizu Nomiyama)

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