* Treasury to sell $35 billion 5-year notes at 1 p.m. (1700 GMT
* NATO says evidence points to use of chemical weapons by Assad forces
* Fed bought $3.03 billion Treasuries maturing between Aug 2021 to Aug 2023
* Contracts to buy previously owned U.S. homes fell for second month in July
By Ellen Freilich
NEW YORK, Aug 28 (Reuters) - Prices of U.S. Treasuries slipped on Wednesday before the Treasury’s $35 billion sale of five-year notes, reversing some of the recent flight-to-safety gains inspired by the potential for a military strike against Syria.
Such a strike would occur in response to an alleged chemical weapons attack on that country’s civilians. On Wednesday, NATO said evidence pointed to the use of chemical weapons by Syria’s president, Bashar al-Assad. Turkey put its armed forces on alert.
The price of the benchmark 10-year Treasury note fell 16/32 to 97-19/32; its yield rose to 2.78 percent from 2.71 percent late on Tuesday.
“Supply is the reason of the day,” said James Sarni, managing principal at Los Angeles-based Payden & Rygel with $84 billion in assets under management, referring to the selling.
But other factors were likely to come back into play that would allow bond prices to rise and yields to ease, he said.
“The rally in bonds is going to continue because the bigger picture here is that the macroeconomic background does not seem consistent with a material change in Fed policy,” he said.
Reports released over the last several days showed that new U.S. home sales fell sharply in July and that orders for long-lasting manufactured goods fell as well. Also, contracts to buy previously owned U.S. homes fell for the second straight month in July, according to the National Association of Realtors, hurt by higher mortgage rates.
In addition to high unemployment and low inflation, there’s the “geopolitical environment which argues for more of a flight to quality,” Sarni said.
“Finally, Congress will return to Washington and we face arguments about the debt ceiling and a possible government shutdown,” he said. “There will be talk and threats about defaulting on our debt. You shake all that up and what comes out is more flight to quality.”
Sarni said 10-year yields could ease to the 2.5 percent area by year end.
Meanwhile, in technical terms, the 2.70 percent yield area “has held as a top for the 2 1/2 percent 10-year note since falling below there on Aug. 13, while the 2.75 percent area is offering support currently ahead of the 2.80 percent yield area that had been resistance,” said John Canavan, fixed-income analyst at Stone & McCarthy Research Associates.
The Treasury is set to auction $35 billion in five-year notes at 1 p.m. (1700 GMT).
“The note may not be a new issue if it stops between 1.50-1.624 percent; instead it will be a re-opening of the 1.5 percent 8/31/18 seven-year note,” said Cantor Fitzgerald Treasury strategist Justin Lederer.
The Federal Reserve Bank of New York said it bought $3.297 billion in Treasuries maturing between August 2021 to August 2023. The purchases are part of the central bank’s $85 billion per month purchases of U.S. Treasuries and mortgage-backed securities aimed at stimulating economic growth and cutting unemployment.