TREASURIES-Treasuries rally as euro zone bond yields fall to record lows

Tue Jul 29, 2014 10:32am EDT

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(Adds economic data, updates prices)
    * Yield curve flattens before 5-year note sale
    * GDP, employment data, Fed in focus for Wednesday
    * Thirty-year bond yields lowest in over a year

    By Karen Brettell
    NEW YORK, July 29 (Reuters) - U.S. Treasuries prices
increased on Tuesday, helped by record low yields on German
government bonds, and the U.S. yield curve flattened to
five-year lows before the United States was due to sell new
five-year notes.
    The debt pared gains, however, after data showed that U.S.
consumer confidence jumped in July to a monthly high not seen
since October 2007. 
    Ten-year German government bond yields, the benchmark for
euro zone borrowing costs, hit record lows of 1.12 percent
, as the prospect of a fresh round of long-term
loans to banks from the European Central Bank from September
supported euro zone debt.
    Treasuries rallied in line with the bunds, and 30-year bond
yields fell to their lowest in over a year.
Investors seeking out lower-risk debt for month-end rebalancing
added to the rally.
    "It starts with bunds, as they compress through 1.15 percent
(yields) it makes more sense to get a little more carry in some
of the other sovereigns," said Jim Vogel, an interest rate
strategist at FTN Financial in Memphis Tennessee.
    Benchmark 10-year notes were last up 3/32 in
price to yield 2.48 percent, down from 2.49 percent late on
Monday.
    The yield spread between U.S. five-year notes and 30-year
bonds also flattened to its lowest level since 2009 as dealers
and investors prepared for a new $35 billion sale of five-year
notes, the second sale of $93 billion in new coupon-bearing
supply this week.
    The curve between five- and 30-year yields 
flattened to 153 basis points. Thirty-year bond yields
 fell as low as 3.22 percent, the lowest since June 7
of last year.
    Thirty-year bonds have been popular with investors seeking
out higher yields while short- and intermediate-dated debt has
underperformed on expectations that the Fed is likely to begin
raising rates next year.
    The five-year note sale comes before a busy day on Wednesday
that will include an employment estimate for Friday's highly
anticipated jobs report for July, gross domestic product data
for the second quarter and the statement from the Federal
Reserve's two day meeting.
    Uncertainty from this week's heavy data calendar may weigh
on Tuesday's five-year note auction.
    "It's the five year today where people should build a
premium in, because of the suspense of the triple punch
tomorrow," said Vogel.
    The Treasury will also sell $29 billion in seven-year notes
on Wednesday in addition to $15 billion in two-year
floating-rate notes.
    Other data on Tuesday showed that U.S. single-family home
prices fell in May on a seasonally adjusted basis, falling short
of expectations calling for a slight gain. 

 (Editing by Bernadette Baum and Meredith Mazzilli)
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