* U.S. Treasury sells $32 bln two-year notes, high yield
* Smallest monthly two-year auction in over five years
* Fed buys $5.08 billion government bonds due 2017-18
By Richard Leong and Luciana Lopez
NEW YORK, Oct 28 Prices for U.S. Treasuries
edged slightly lower on Monday as investors made room for this
week's $96 billion in longer-dated government debt supply, with
yields hovering near three-month lows.
The Treasury on Monday kicked off the week's supply with the
sale of $32 billion in two-year notes at a high yield of 0.323
percent, with the highest bid-to-cover ratio in six months.
"The auction was very well bid," said Thomas Simons, a money
market economist at Jefferies & Co in New York.
Monday's auction was the smallest monthly supply of this
maturity since August 2008.
The government began reducing the size of its two-year
auctions in August as a result of lower borrowing needs and
ahead of introducing two-year floating-rate debt in early 2014.
The two-year auction will be followed by a $35 billion sale
of five-year notes on Tuesday and a $29 billion auction of
seven-year notes on Wednesday.
Traders and analysts anticipated solid demand for this
week's sales on views the Federal Reserve will keep buying bonds
at its current pace to prop up the economy, which was weakened
by this month's 16-day partial government shutdown.
"The prevalent opinion of the market is the Fed is on hold
with tapering until 2014," said Mike Cullinane, head of
Treasuries trading at D.A. Davidson at St. Petersburg, Florida.
"This week's supply should be well-received."
Fed policymakers will meet on Tuesday and Wednesday. They
surprised investors last month when they refrained from
reducing their $85 billion of monthly purchases of Treasuries
and mortgage-backed securities, known as QE3. The decision
spurred a bond market rally, sending the 10-year yield down some
50 basis points from a 25-month high of 3 percent.
The Fed on Monday bought $5.08 billion of Treasuries
maturing October 2017 to June 2018 as its latest QE3 purchase.
With the Fed likely to assure investors that the current QE3
purchases will stay in place in coming months, traders and
analysts said benchmark yields will likely bounce within a tight
range, at least until the next non-farm payrolls report, due on
"This lends itself to a rangebound market," said Cullinane,
who expects the 10-year yield to trade 2.45 percent to 2.65
percent in the near term.
The government has released economic data that were delayed
due to the shutdown after President Barack Obama and Congress
reached a last-minute deal on Oct. 16 to temporarily fund
federal spending and raise the debt ceiling through early 2014.
U.S. factory output grew 0.6 percent in September, its
largest monthly increase since February, the Fed reported on
On the open market, 10-year Treasury notes were
trading 2/32 lower in price to yield 2.509 percent from 2.503
percent on Friday.
The 10-year yield touched a three-month low of 2.471 percent
last week after disappointing September jobs figures.