June 16, 2010 / 8:31 PM / in 8 years

TREASURIES-Prices gain on slide in U.S. housing starts

* U.S. housing starts fell 10 percent in May

* Yields hold in tight recent range

* Fannie, Freddie delistings add to recovery uncertainty (Adds analyst’s quote, updates prices)

By Chris Reese

NEW YORK, June 16 (Reuters) - U.S. Treasury debt prices rose on Wednesday after data showed housing starts in May slumped to a five-month low, suggesting the economic recovery remains tentative.

Treasuries’ gains were muted by a U.S. stock market that vacillated on either side of unchanged through the day, and the tight correlation between Treasury prices and stock prices continued to dominate market action. The major U.S. indexes finished the day little changed.

“The stock market was down a little bit and then kind of came back ... and the housing starts number came out very negative” for the economy, said James Caron, head of global rates research at Morgan Stanley in New York.

The inverse relationship between stocks and Treasuries means that as stocks rise, Treasuries prices fall and vice versa.

Benchmark 10-year Treasury notes US10YT=RR closed out the day 10/32 higher in price to yield 3.27 percent, down from 3.30 percent late on Tuesday.

Treasuries have been mired in a fairly tight range for the past five days, with the benchmark yield fluctuating between 3.18 percent and 3.33 percent since June 10 as investors balance worries over the state of Europe’s fiscal situation and some disappointing U.S. employment, sales and housing data with other signs that manufacturing is leading a recovery.

“The reality is that we have these two risks -- things could get a lot worse, or things could get a lot better, and in the middle things will be volatile but within the range,” Caron said.

Analysts said the market had yet to focus on the Treasury’s sale of new notes next week. Investors typically sell some of their existing holdings of Treasury debt to make room for new supply.

“We’ll worry about supply next week,” said Raymond Remy, head of U.S. fixed income at Daiwa Securities in New York. The Treasury Department will announce on Thursday the sizes of sales of two-year, five-year and seven-year notes scheduled for next week.

The U.S. Commerce Department on Wednesday said housing starts fell 10 percent in May, the largest percentage point decline in 14 months, following the expiration of homebuyer tax credit program. For more, click on [ID:nN16144404].

“There was a question of whether there would be a second leg lower in housing and exactly how much lower that leg would be,” said Ian Lyngen, senior government bond strategist at CRT Capital Group in New York.

“We also had Fannie Mae and Freddie Mac delisted,” from the New York Stock Exchange, he said. “We’re not making too much of that but it just reminds us of the uncertainties that continue to plague this stage of the economic recovery.” [ID:nN16133300]

Two-year Treasury notes US2YT=RR traded 1/32 higher in price to yield 0.74 percent, down from 0.76 late on Tuesday, while the 30-year Treasury bond US30YT=RR rose 20/32 to yield of 4.19 percent from 4.22 percent. (Additional reporting by Emily Flitter; Editing by Leslie Adler)

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