June 11, 2014 / 8:00 PM / in 4 years

TREASURIES-Prices little changed after soft U.S. 10-year auction

* Foreign central bank auction participation declines

* Investors look to 30-year bonds with caution (Adds comment, updates prices, adds 10-year-note auction results)

By Gertrude Chavez-Dreyfuss

NEW YORK, June 11 (Reuters) - U.S. Treasury debt prices were flat to slightly lower on Wednesday in thin trading, after a lackluster 10-year auction that raised concerns about weakening demand for long-term government paper.

Treasuries sold off in the aftermath of the auction, which saw a higher-than-expected yield, suggesting investors are demanding a premium to hold U.S. debt. Foreign central bank participation declined again, continuing a trend seen since February.

The high yield for the U.S. 10-year note was 2.648 percent versus 2.64 percent at the bid deadline. Bids totaled $60.5 billion for a decent 2.88 bid-to-cover, versus 2.63 in April and an average of 2.65.

Indirect bidders, which include foreign central banks, took just 36.1 percent of the 10-year note, compared to last month’s 49.3 percent, and a 45.2 percent average.

“The auction was a little disappointing. We tailed out a bit and the indirect bidding was on the lower side,” said Kim Rupert, managing director at Action Economics in San Francisco.

In afternoon trading, 10-year notes were down 1/32 in price to yield 2.642 percent, from 2.648 percent late on Tuesday. Earlier in the global session, 10-year yields hit a one-month high of 2.662 percent.

Rupert thinks demand for Treasuries has faded for now, noting that the expected demand for U.S. debt in the aftermath of the European Central Bank’s easing measures has yet to materialize.

Market participants have speculated that global investors would buy more Treasuries because they are undervalued relative to German Bunds, which had a tremendous run in anticipation of the ECB action.

“That whole notion of the arbitrage between Bunds and Treasuries are overblown,” Rupert said.

U.S. 30-year bonds were flat with a yield of 3.466 percent , from 3.481 percent late Tuesday.

Prior to the auction, some market participants fretted about the lack of demand for U.S. government paper.

“We had auctions that tailed for the fist time — the 2s, 5s, and 7s all tailed two weeks ago. People are somewhat guarded that we may see a continuation of that trend of just a general lack of demand,” said Tom di Galoma, head of fixed-income rates at ED&F Man in New York.

The market has now seen higher-than-expected rates in four of the last five re-openings in the 10-year sector and the smallest indirect award since May, wrote CRT in a research note.

On Thursday, the U.S. Treasury will sell the last tranche of its debt, with the auction of $13 billion in 30-year bonds.

The 30-year bond has seen recent weak demand. Of the previous five auctions, two have fetched a higher-than-expected yield. (Editing by Leslie Adler)

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