* U.S. Treasury to sell $32 bln 3-year note supply
* U.S. Fed buys $1.57 bln in long-dated bonds
* Bullard says Fed still has room to buy more bonds
* Thirty-year swap spread widens, approaches zero
By Richard Leong
NEW YORK, April 9 U.S. government debt prices
edged higher on Tuesday in advance of a $32 billion auction of a
new three-year note issue, which was the first part of the $66
billion in total supply of longer-dated debt this week.
Benchmark yields held at their short-term chart supports
after they failed to climb back to levels prior to the release
of the government's dismal payrolls report last Friday. They
fell to session lows on buying tied to the Federal Reserve's
regular Treasuries purchases aimed to reduce unemployment.
The Fed earlier bought $1.57 billion in government bonds
that mature in Feb. 2037 to Feb. 2043.
"The market is not going to go down a lot because of the Fed
buyback," said Aaron Kohli, an interest rate strategist at BNP
Paribas in New York.
The U.S. bond market also remained supported by bets in
anticipation of heavy purchases from Japanese insurers and
pension funds as they seek higher-yielding debt overseas after
the Bank of Japan's plan to double its monthly asset purchases
in a bid to stimulate its sluggish economy.
Last week's batch of weaker-than-expected data on jobs and
business activity added safehaven bids for Treasuries, whose
yields fell to their levels lowest of the year on Friday.
Still the bond market rally has paused on the perception
that it was overdone for now and the expected buying from Japan
has not materialized, analysts and traders said.
"We ran ahead too far too soon and we still have supply to
deal with," said Thomas Roth, executive director of U.S.
government bond trading at Mitsubishi UFJ Securities USA in New
In "when-issued" activity, traders expected the upcoming
three-year note issue to yield 0.3420 percent,
lower than the 0.411 percent yield at last month's three-year
After the three-year note sale at 1 p.m. (1700 GMT), the U.S.
Treasury Department $21 billion in 10-year notes on Wednesday
and $13 billion in 30-year bonds on Thursday
On the open market, benchmark 10-year Treasury notes were up
4/32 in price at 102-13/32, yielding 1.731 percent, down 1.4
basis point from late on Monday.
Bond prices bounced up from their earlier lows, partly on
comments from St. Louis Federal Reserve President James Bullard
who told CNBC television that the U.S. central bank still has
more room to buy bonds to help support the economic recovery.
The 10-year yield briefly broke above its 200-day moving
average of 1.7431 percent, according to Reuters data. It also
retraced 50 percent of last week's decline due to buying spurred
by Bank of Japan's $1.4 trillion stimulus plan and the payroll
report that showed a stunningly weak jobs gain of 88,000 in
In the derivatives market, the spread on U.S. 30-year
interest swap rates over 30-year Treasury bond yields crept
closer to zero earlier. This measure of the difference between
long-term U.S. government and private borrowing costs has been
stuck in negative territory more than four years on the view the
long-term cost for U.S. government debt will remain higher than
that of the private sector due to rising costs for its social
programs and erosion of the dollar's value against other major
This widening of the 30-year spread has been fueled by
speculation that some dealers must close out 30-year swaps,
which they use to hedge investments known as power reverse dual
currency notes (PRDC) they sold to investors.
The yen's rise against the U.S. dollar led dealers to hold
30-year swap positions to ensure cash flows to pay PRDC
investors, but the recent rapid weakening of the yen due to the
BoJ's aggressive easing has spurred bets dealers will exit these
The 30-year swap spread tightened to minus 3.00 to minus
3.50 basis points when the yen flirted with a four-year
low against the dollar within striking distance of the 100 yen
threshold during Asian trading. It was last quoted at minus 4.50
to minus 5.00 basis points, which was 0.75 basis points tighter
than Monday, when the yen gained versus the dollar.