Longer-dated bonds rise on weak home sales data

By Chris Reese

NEW YORK (Reuters) - Longer-dated Treasury debt prices gained on Tuesday after data showing the housing market continues to slide, threatening to drag the economy deeper into recession.

Shorter-dated maturities eased with some concern that a flood of expected new debt issuance would eventually force prices lower, following a record-large $28 billion five-year note auction.

Analysts emphasized, however, that trade volume was well below average in a holiday-shortened week, and that the few remaining traders were reluctant to set a market direction with any conviction. Price moves were comparatively small given recent volatility.

Treasuries "are in a range, and they are choppy going into the end of the year, traders seem undecided at best," said Ian Lyngen, interest rate strategist at RBS Greenwich Capital in Greenwich, Connecticut.

Benchmark 10-year Treasury notes traded 1/32 higher in price for a yield of 2.17 from 2.18 percent late on Monday. Benchmark yields, which move inversely to prices, remain not far off the five-decade low of 2.04 percent reached last week.

Five-year notes traded 3/32 lower in price for a yield of 1.44 percent from 1.42 percent late on Monday, while two-year notes were yielding 0.92 percent, unchanged from a high yield of 0.92 percent in an auction of $38 billion of the notes on Monday.

The two-year note auction on Monday was a record large size, as was the $28 billion five-year note auction on Tuesday.

Housing and manufacturing data on Tuesday was "all bad news," said Ward McCarthy, managing director with Stone & McCarthy Research Associates, in Princeton, New Jersey.

Existing home sales fell a record 8.6 percent in November and the Richmond Federal Reserve Bank's manufacturing index plummeted to a reading of minus 55 in December.

The rally in longer-maturity Treasuries, which has put the 30-year bond on course for its strongest year since 1982, makes the market increasingly vulnerable to a sell-off at the least sign of less dismal economic data, analysts warned.

"The entire Treasury market looks expensive to me," McCarthy said. "But with quarter-end coming up, there is still a strong incentive on a lot of financial institutions to hold Treasuries."

The 30-year Treasury bond traded 30/32 higher in price for a yield of 2.64 percent from 2.67 percent late on Monday.

The Treasury curve continued to flatten on Tuesday, with the spread between the yield on two-year notes and 10-year notes narrowing to 126 basis points, its lowest since late June.

(Editing by Leslie Adler)