TREASURIES-U.S. bond yields edge up before 3-year auction

Tue Aug 12, 2014 9:25am EDT

Related Topics

* Focus stays on developments in Gaza, Iraq and Ukraine

* U.S. 3-year note supply set to sell at lowest yield in 4 months

* Low German Bund yields offset domestic supply pressure

By Richard Leong

NEW YORK, Aug 12 (Reuters) - U.S. Treasury debt yields inched higher on Tuesday as traders sold some bond holdings in advance of a $27 billion auction of three-year notes, part of this week's $67 billion quarterly government refunding.

The selling pressure from this week's bond supply has been offset by a steady bid for safe-haven Treasuries on worries about conflicts in Iraq, eastern Ukraine and Gaza. Benchmark 10-year yields have lingered not far from last week's 14-month low of 2.349 percent.

"The U.S. bond market has been driven a lot by external and geopolitical factors rather than improving domestic data," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey.

Tension remained high in Iraq as its prime minister Nuri al-Maliki refused to step down after his replacement was named.

Israelis and Palestinians, amid a 72-hour truce, have not reached a deal to end their month-old war in Gaza.

Fears that a Russian aid convoy to Ukraine could become a pretext for an invasion into eastern Ukraine, where government forces are closing in on pro-Russian rebels, knocked a closely watched gauge on German investor and analyst sentiment to its lowest level in more than 1-1/2 years in August.

The index decline supported the view the European Central Bank would act aggressively soon to help the fragile euro zone economy, pushing 10-year German Bund yields near their record low set last week.

The rockbottom Bunds yields helped to keep a lid on the rise in Treasuries yields despite encouraging domestic data on jobs and business activity, analysts said.

On low volume in early U.S. trading, benchmark 10-year Treasuries yields were last at 2.424 percent, up about half a basis point from late Monday, while the 30-year bond yield rose nearly 1 basis point to 3.242 percent.

In the "when-issued" market, the upcoming three-year note issue due August 2017 was quoted to sell at a yield of 0.9160 percent, which would be the lowest yield in four months.

After the three-year note sale at 1 p.m. (1700 GMT), the Treasury Department will sell $24 billion in 10-year notes on Wednesday and $16 billion of 30-year bonds on Thursday.

At 11 a.m. (1500 GMT), the Federal Reserve will buy $950 million to $1.15 billion in bonds due in 2036 to 2044, as a part of its bond purchase program that is expected to wind down in October. (Reporting by Richard Leong; Editing by Chizu Nomiyama)

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