January 26, 2017 / 8:18 PM / a year ago

TREASURIES-U.S. bond yields fall after solid 7-year auction

* Indirect bidders buy record share at 7-year note auction
    * Record highs on Wall Street keep lid on yield decline
    * First reading on U.S. Q4 2016 GDP on tap Friday

 (Updates market action, adds quotes)
    By Richard Leong
    NEW YORK, Jan 26 (Reuters) - U.S. Treasury yields fell on
Thursday with benchmark yields retreating from a four-week high,
after strong investor demand at a $28 billion auction of
seven-year notes, part of this week's $88 billion coupon-bearing
government debt supply.
    Skittishness about a faster pace of rate increases by the
Federal Reserve, if U.S. President Donald Trump's economic
policies bolster growth and inflation, cast a pall over this
week's Treasuries sales.
    Indirect bidders which include fund managers and foreign
central banks bought a record share of the latest seven-year
issue, marking a contrast to the poor auctions of two-year and
five-year Treasuries on Tuesday and Wednesday.
    "The seven-year sale was better than other two," said Larry
Milstein, head of government and agency trading at R.W.
Pressprich & Co in New York. "It seemed like we were oversold.
It may have been some short-covering."
    On Tuesday and Wednesday, investors reduced their Treasuries
holdings in the wake of Trump's actions on domestic business
investments, which they view as promoting heftier company
profits, and his rhetoric on trade and immigration, which they
calculate may push up inflation.
    Buttressed by growing optimism, investors have preferred
stocks over bonds, with the Dow breaking above 20,000 for
the first time on Wednesday and the S&P 500 and Nasdaq
also reaching record highs. 
    "The new administration is a big change from the previous
one. Political risks have pushed yields up and down," said Boris
Rjavinski, senior rate strategist at Wells Fargo Securities in
Charlotte, North Carolina.
    The yield on benchmark 10-year Treasury notes 
was down over 1 basis point at 2.508 percent after hitting 2.555
percent earlier, which was its highest since Dec. 28, according
to Reuters data.
    Bond yields bounced in a narrow range with the Dow holding
above its milestone. 
    With this week's supply out of the way, investors will
receive fresh clues on the economy and whether it shows enough
strength for the Fed to consider further rate increases.
    Fed policy-makers, who will meet next Tuesday and Wednesday,
are expected to leave rates unchanged after raising them in
December.    
    Investors will focus on the government's first reading on
gross domestic product in the final quarter of 2016. Economists
polled by Reuters forecast GDP likely slowed to 2.2
percent growth pace in the fourth quarter from 3.5 percent in
third quarter. 
    "If we see a stronger number, we could see another backup in
yields," R&W Pressprich's Milstein said.    
  January 26 Thursday 3:03PM New York / 2003 GMT
                               Price                    
 US T BONDS MAR7               149-26/32    0-11/32     
 10YR TNotes MAR7              123-244/256  0-36/256    
                               Price        Current     Net
                                            Yield %     Change
                                                        (bps)
 Three-month bills             0.4975       0.505       0.005
 Six-month bills               0.605        0.6153      0.005
 Two-year note                 99-204/256   1.2281      -0.016
 Three-year note               99-172/256   1.4884      -0.027
 Five-year note                99-146/256   1.9657      -0.026
 Seven-year note               99-172/256   2.3014      -0.020
 10-year note                  95-156/256   2.508       -0.015
 30-year bond                  95-216/256   3.0893      -0.020
                                                        
   DOLLAR SWAP SPREADS                                  
                               Last (bps)   Net Change  
                                            (bps)       
 U.S. 2-year dollar swap        28.50         0.25      
 spread                                                 
 U.S. 3-year dollar swap        23.75         1.00      
 spread                                                 
 U.S. 5-year dollar swap         6.50         1.25      
 spread                                                 
 U.S. 10-year dollar swap       -9.50         0.75      
 spread                                                 
 U.S. 30-year dollar swap      -41.00         1.00      
 spread                                                 
   
  

    
 (Reporting by Richard Leong; Editing by Nick Zieminski and Lisa
Shumaker)
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