TREASURIES-Little change before term auction results
By Naomi Tajitsu
TOKYO, Dec 19 (Reuters) - U.S. Treasuries were little changed on Wednesday as investors awaited results of a funding auction held earlier this week as part of central bank measures to stem a liquidity shortage by allowing banks more access to funds.
The Fed offered $20 billion on Monday in a term auction of 28-day funds, the first of four offers as part of a coordinated effort among central banks to encourage banks to borrow and lend among each other.
Market participants expect the plan to reduce the need for further rate cuts by the Federal Reserve and lower official rates among its counterparts, but some said the amount of funds may be inadequate, which could keep Treasuries supported by flight-to-safety demand.
"The issuing amount isn't that much," said a dealer at a Japanese trust bank.
"If the results show that not enough funds were made available, we could see more demand for shorter-dated Treasuries, which would push their yields lower."
Treasury note futures TYv1 slipped 3.5/32 to 113-17/32, keeping their distance from a one-month low of 111-23.5/32 hit late last week.
The yield on the benchmark 10-year note US10YT=RR was 4.124 percent, little changed from levels in late New York on Tuesday.
Two-year notes US2YT=RR were also unchanged around 3.204 percent.
This put the 10-year/two-year spread at 92 basis points, narrowing from around 103 basis points touched last week, its widest in nearly three years.
In addition to the liquidity auction results, investors awaited fourth-quarter earnings results for Morgan Stanley (MS.N) later on Wednesday to gauge the extent to which the investment bank has been affected by problems in the credit and U.S. subprime mortgage markets.
The announcement will be watched after financial heavyweight Goldman Sachs Group Inc (GS.N) offered a cautious outlook for its business on Tuesday due to recent global credit problems, even as its fourth-quarter earnings rose 2 percent, beating expectations and capping a record year.
The Fed last week cut rates by 25 basis points to 4.25 percent, which took them down a full percentage point from September, to shield the U.S. economy from a sluggish housing sector, as well as the fallout from the mortgage market meltdown.
While market participants anticipate more rate cuts next year, the Fed has suggested reluctance to cut further, in part given lingering inflation pressures.
Dallas Federal Reserve Bank President Richard Fisher told Reuters on Tuesday that the central bank must not "overreact" to the credit crisis and take risks with inflation.
"The actions we've taken should provide some buoyancy through the course of next year to the economy," he said in an interview. "But I want to make sure that we don't overreact and create further problems down the road." (Editing by Michael Watson)
