TREASURIES-Prices steady after solid data, buoyed by Iraq safety buying

Mon Jun 16, 2014 4:16pm EDT

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(Recasts, updates prices)
    * Bonds gain on safety bid on Iraq, Ukraine tensions
    * Prices pare gains on solid U.S. economic data
    * Fed meeting on Wednesday in focus
    * 5-year, 30-year yield curve flattest since 2009

    By Karen Brettell
    NEW YORK, June 16 (Reuters) - Most U.S. Treasuries prices
were flat on Monday after solid U.S. economic data overcame
earlier strength, after fighting in Iraq and Ukraine increased
demand for safe-haven bonds.
    U.S. manufacturing output rose solidly in May as production
increased across the board, bolstering expectations that
economic growth will rebound strongly this quarter.
 
    That erased an earlier safety bid as worries about Iraq
intensified on the news that Sunni insurgents seized a city in
northwestern Iraq on Sunday after heavy fighting, solidifying
their grip on the north after a lightning offensive that
threatens to dismember Iraq. 
    Russian natural gas exporter Gazprom also reduced
supplies to Ukraine on Monday after Kiev failed to meet a
deadline to pay off its gas debts in a dispute that could
disrupt supplies to the rest of Europe. 
    "There was a reasonable flight-to-quality bid overnight with
the developments in Iraq and Gazprom, so global equities were
under a fair amount of pressure and that gave a bid to longer-
dated Treasuries," said Ian Lyngen, senior government bond
trader at CRT Capital in Stamford, Connecticut.
    "We've given some of that up in the wake of the industrial
production numbers," Lyngen added.
    A gauge of manufacturing in New York state also rose in
June, while confidence among U.S. homebuilders rose for the
first time this year.  
    Benchmark 10-year notes were last up 1/32 in
price to yield 2.60 percent, after earlier falling as low as
2.58 percent. Thirty-year bonds gained 9/32 in price
to yield 3.40 percent, after earlier falling to 3.35 percent. 
    Longer-dated bonds rallied even as shorter-dated debt was
moderately weaker, on concerns that central banks may be closer
to raising interest rates than some expect.
    Bank of England Governor Mark Carney surprised markets last
Thursday when he said that Britain could become the first major
economy to tighten monetary policy since the 2008 financial
crisis. 
    The yield curve between five-year notes and 30-year bonds
 flattened to a new five-year low of 165 basis
points overnight.
    Investors this week are next focused on the Federal
Reserve's monetary policy statement on Wednesday, when the U.S.
central bank is expected to announce it will continue paring its
bond purchase program and cut its growth projections.
    "They will downgrade their growth expectations, but they
will shift their unemployment rate projections lower because the
unemployment rate has gone down faster than expected, so that
should be fairly positive," said Gennadiy Goldberg, an interest
rate strategist at TD Securities in New York.
    The Fed bought $2.70 billion in notes due in 2018 and 2019
on Monday as part of its ongoing purchases. It will purchase
between $0.85 billion and $1.10 billion in bonds due 2036 to
2044 on Tuesday.

 (Editing by W Simon, Peter Galloway and Chizu Nomiyama)
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