TREASURIES-Yields steady after solid U.S. data; ahead of auctions

NEW YORK, Jan 7 (Reuters) - Yields were stable on Tuesday morning, little changed across maturities, after better-than-expected non-manufacturing data, a significant drop in the U.S. trade deficit and ahead of a $38 billion three-year note auction.

The U.S. trade deficit fell to a more than three-year low in November as imports declined further, weighed down by the Trump administration’s trade war with China, and exports rebounded, suggesting the economy ended 2019 on solid footing.

“The trade balance was a lot more than anticipated, so that has positive implications for GDP being revised higher,” said Mary Ann Hurley, vice president, fixed income trading at D.A. Davidson.

In other positive news, an Institute for Supply Management report on the U.S. services sector showed its Purchasing Managers Index at 55.0 in December, above expectations and the highest since August.

Tuesday’s report comes after the ISM manufacturing index last week fell short of expectations as trade tensions between the United States and China slowed activity. “The non-manufacturing sector, which is the greater part of the economy, is definitely more important,” said Hurley.

Still, further evidence of the contraction in manufacturing helped constrain yields on Tuesday. The 10-year yield was last half a basis point higher at 1.816%.

The Commerce Department on Tuesday said new orders for U.S.-made goods fell in November, pulled down by steep declines in demand for machinery and transportation equipment.

Tuesday morning’s data is unlikely to significantly affect the Federal Reserve’s thinking on its monetary policy in the near term. The two-year yield, which reflects market expectations of changes to interest rates, was 0.1 basis point lower at 1.547%.

The chance that rates will be altered from the current range of 150-175 basis points does not rise above 50% until September 2020, according to CME Group’s FedWatch tool.

Later on Tuesday, the Treasury Department will auction off $38 billion in new supply of three-year notes. Tensions with Iran could potentially boost demand for the notes, Hurley said.

“Of the three note auctions (this week), it’s going to be the three-year that would see the most impact from that. Generally, international tensions have more of a tendency to impact the bill market and two-year notes. But definitely there could be some further interest there.”

Later in the week, $24 billion of 10-year notes and $16 billion of 30-year notes will also be auctioned.

Reporting by Kate Duguid; Editing by Steve Orlofsky