October 27, 2010 / 1:26 PM / in 8 years

TREASURIES-Prices cut before Treasury 5-yr note auction

* Price-cutting before $35 bln 5-yr Treasury note auction

* Supply comes before another expected round of Fed easing

* Size and pace of purchases by Fed uncertain

* Debate over whether Fed will be able to reflate economy

By Ellen Freilich

NEW YORK, Oct 27 (Reuters) - U.S. Treasuries prices fell on Wednesday as traders cut prices before the third sale of U.S. government debt this week and amid debate over the size and pace of the Federal Reserve’s next round of monetary easing.

More restrained expectations about the aggressiveness of the Fed’s next program of purchases, expected to be announced after the U.S. central bank’s policy meeting Nov. 2-3, fed the selling.

Signs of weaker business investment spending, however, in a report on September U.S. durable goods orders, moved bond investors to trim the steepest losses. The data argued for more assertive Fed action to stimulate the economy.

“Non-defense capital orders excluding aircraft (viewed as a proxy for business spending) is telling us that demand is still very weak,” said Robbert Van Batenburg, head of global research at Louis Capital Markets in New York. “This will (support calls) for a forceful quantitative easing next week.”

Benchmark 10-year Treasury notes US10YT=RR, down 15/32 before the report, were down 10/32 after .

Their yields stood at 2.68 percent, after rising to 2.70 percent earlier in the session, the highest in over a month and up from from 2.65 percent late on Tuesday.

As market participants have tried to figure out the shape of the monetary easing to come, expectations have centered around an initial commitment to buy at least $500 billion in Treasury debt over five months to spur lending and support an economic recovery that is too weak to boost employment.

Fed officials, too, have outlined a range of views, with some pushing for aggressive stimulus and others sounding skeptical of additional accommodation. [ID:nN25168493]

Thomas di Galoma, head of fixed-income rates trading at Guggenheim Securities in New York, said those who think the next round of Fed easing won’t live up to its advance billing are not taking into consideration the weight that Fed Chairman Ben Bernanke’s dovish views will carry with the board.

“(Bernanke) will persuade them toward $1.5 to 2 trillion in total QE2 (quantitative easing) program,” he said. “This looks like another buying opportunity in bonds.”

DiGaloma said Asian buyers entered the market when the 10-year yield reached 2.70 percent.

He said that level offered a good juncture to buy with a target of 2.50 percent on the 10-year yield.

“The bottom line is U.S. rates will stay low for years to come as most have misjudged the deflationary environment we are in, which will keep inflation prospects quite low,” he said.

In when-issued trade, the $35 billion in five-year notes to be sold at 1 p.m. (1700 GMT) yielded 1.31 percent, a somewhat more appealing yield than the 1.25 percent offered on Tuesday and above the high yield of 1.26 percent at which five-year notes were sold in September.

The government sold Treasury Inflation-Protected Securities on Monday with a negative yield. Good demand emerged, as expected, for the Treasury’s sale of two-year notes on Tuesday. The government will sell seven-year notes on Thursday.

Thirty-year bonds US30YT=RR fell 25/32 in price, after a steeper fall on Tuesday. Their yields rose to 4.04 percent from 4.00 percent on Tuesday.

The 30-year Treasury bond has underperformed shorter maturities as policymakers have stepped up their discussion of further monetary ease on the assumption the Fed would buy maturities in the mid-range, or belly, of the curve. (Additional reporting by Richard Leong; Editing by Padraic Cassidy)

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