August 26, 2014 / 1:50 PM / in 3 years

TREASURIES-Yields fall as European bond yields hit record lows

* Yields fall as European debt yields fall to record lows
    * Ukraine tensions keep safety bid for U.S. debt
    * Treasury to sell $29 bln in two-year notes

    By Karen Brettell
    NEW YORK, Aug 26 (Reuters) - U.S. Treasuries yields fell on
Tuesday as European bond yields fell to record lows on
expectations the European Central Bank may ease monetary policy
as soon as next week.
    ECB President Mario Draghi said on Friday the bank was
prepared to respond with all available tools if euro zone
inflation drops further. Investors took this to mean the ECB
could start an asset purchase program or other stimulus
    The next ECB policy meeting is on Sept. 4. Preliminary euro
zone data due on Friday are forecast to show annual inflation
was just 0.3 percent this month, down from 0.4 percent in July,
and well below the ECB's target of just under 2 percent.
    "It's tough for Treasuries to sell off here given what's
going on in Europe," said Gennadiy Goldberg, interest rate
strategist at TD Securities in New York.
    Benchmark 10-year Treasuries were last up 5/32
in price to yield 2.38 percent, down from 2.39 percent late on
    German 10-year government bond yields, by
comparison, fell to 0.94 percent.
    Concerns over tensions in Ukraine is also helping maintain a
safety bid for U.S. Treasuries.
    Ukraine released a video of captured Russian soldiers on
Tuesday, sharply escalating a dispute over Moscow's alleged
backing for separatist rebels in the east of the former Soviet
    Europe is taking center stage as the U.S. economic calendar
is relatively light until the release of August's employment
report on September 5. The Federal Reserve is then due to meet
on September 15 and 16.
    "We don't have much on the U.S. monetary front in the next
few weeks, which is letting the Ukraine tensions creep back into
the market's crosshairs," Goldberg said. 
    Treasuries failed to react to mixed U.S. economic data.
    Orders for long-lasting U.S. manufactured goods posted their
biggest gain on record in July on strong international demand
for aircraft, but the underlying trend remained consistent with
a steady pace of domestic economic growth. [ID: nLNNQJEA0D]
    U.S. single-family home prices fell 0.2 percent in June and
fell short of expectations, according to the S&P/Case Shiller
composite index of 20 metropolitan areas. 
    The Treasury is also due to auction $29 billion in two-year
notes on Tuesday, the first in $93 billion in new coupon-bearing
supply this week. The government will also sell $35 billion in
five-year notes on Wednesday and $29 billion in seven-year notes
on Thursday, as well as $13 billion in two-year floating-rate
notes on Wednesday.

 (Editing by Meredith Mazzilli)
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