TREASURIES-Yield curve flattest in five years before Fed meeting

Tue Jul 29, 2014 2:38pm EDT

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(Recasts with five-year auction, adds quotes)
    * Yield curve flattest since 2009
    * Five-year note sale sees solid demand
    * 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 after a new sale of five-year notes saw
solid demand, and the U.S. yield curve flattened to five-year
lows ahead of a busy data calendar and Federal Reserve meeting
statement.
    Long-dated Treasuries have been gaining against short- and
intermediate-dated debt as investors reach for higher yields at
the long end, and worry about the Federal Reserve potentially 
raising interest rates next year.
    The yield spread between U.S. five-year notes and 30-year
bonds flattened to its lowest level since 2009 on
Tuesday at 153 basis points.
    Thirty-year bond yields fell as low as 3.22
percent, the lowest since June 7 of last year.
    "The theme has really been the flattening," said Justin
Lederer, an interest rate strategist at Cantor Fitzgerald in New
York.
    "Short and intermediates are starting to price in the Fed
ultimately going as we get closer and closer, and the long end
is seeing some very good duration buying," Lederer said.
    Fed officials could make subtle yet telling changes to their
policy statement on Wednesday, as they buy more time to evaluate
U.S. economic strength and plan how and when to eventually raise
interest rates. 
    The meeting coincides with a busy day for economic releases
that will include a private employment report ahead of Friday's
highly anticipated jobs data for July and gross domestic product
data for the second quarter. GDP is also expected to be revised
for the first quarter, when growth unexpectedly receded.
    Tuesday's price gains paused briefly as the Treasury sold
$35 billion of five-year notes, the second sale of a total of
$93 billion in new coupon-bearing supply this week.
    They resumed after the auction saw solid demand. Direct
bidders bought the largest share at a five-year auction since
December 2012, and primary dealers took the smallest allocation
for a five-year sale on record. 
    The Treasury will sell $29 billion in seven-year notes on
Wednesday in addition to $15 billion in two-year floating-rate
notes.
    Treasuries were also supported by German, Italian and
Spanish government debt yields all hitting record lows on
Tuesday, as well as from month-end buying.
    Ten-year German government bond yields, the benchmark for
euro zone borrowing costs, hit 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.
    "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.

 (Editing by Bernadette Baum, Meredith Mazzilli and James
Dalgleish)
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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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