TREASURIES-Bonds gain on housing data, 5-year auction
(Adds strategist quote, updates prices)
By Chris Reese
NEW YORK, Sept 27 (Reuters) - U.S. Treasury debt prices rose on Thursday after more dire housing news supported expectations the Federal Reserve will continue to cut interest rates.
The market was also buoyed by solid demand in an auction of 5-year Treasury notes, which eased fears that foreigners might be losing their appetite for U.S. government debt.
Bonds moved higher on Thursday after a government report showed the pace of new-home sales fell sharply to a seven-year low in August. For details see [ID:nN27336049].
"Certainly that housing number got some people's attention this morning," said Bill Hornbarger, chief fixed-income strategist at A.G. Edwards & Sons in St. Louis.
Treasury debt prices then extended gains in the early afternoon following solid demand for the auction of $13 billion of 5-year notes. The note sale followed decent demand for $18 billion of 2-year notes auctioned on Wednesday.
"There is more interest right now on the buy side of the market," said Thomas di Galoma, head of U.S. Treasury trading at Jeffries & Co in New York, adding "the investor community is looking for a way to enter the market, and one of the ways they are entering the market is in the auction process."
Benchmark 10-year Treasury notes US10YT=RR traded 13/32 higher in price for a yield of 4.57 percent from 4.62 percent late on Wednesday.
Many investors expect a struggling housing market will help spur the Fed to cut benchmark interest rates at a policy meeting in October, following a half-percentage-point cut last week.
U.S. interest rate futures suggested that traders are pricing in an 88 percent perceived chance that the Fed will lower the federal funds rate by another quarter point from the current 4.75 percent at its Oct. 30-31 meeting.
"For the Fed, the question is whether this is worse than they really expected and whether it might well be a reason for them to do more pre-emptive easing," said Pierre Ellis, senior economist at Decision Economics in New York, after data showed an 8.3 percent drop in August new-home sales.
"Having moved so sharply already, they're going to want to finish what they've started," Ellis said.
Traders also cited possible quarter-end buying of Treasuries for some price support, as financial institutions moved to square their books.
"There is month- and quarter-end stuff, a lot of people want to be shown as owning Treasuries at the end of the quarter," A.G. Edwards & Sons' Hornbarger said.
Two-year notes US2YT=RR traded 2/32 higher in price for a yield of 3.96 percent from 3.99 percent late on Wednesday, while 5-year notes US5YT=RR traded 7/32 higher for a yield of 4.22 percent from 4.27 percent.
The 30-year bond US30YT=RR traded 28/32 higher in price for a yield of 4.84 percent from 4.89 percent.
While Treasury debt prices rose and yields eased, interest rate swap spreads were narrower on the day. (Additional reporting by Richard Leong and Ellen Freilich)
