Modest price cuts for bonds before 5-year auction

By Ellen Freilich

NEW YORK (Reuters) – U.S. Treasuries showed modest losses on Tuesday as traders trimmed prices to entice buyers to the Treasury’s five-year note auction later in the day.

The Treasury will sell $35.0 billion in five-year notes at 1 p.m. ET, the second of the Treasury’s three auctions of coupons this week, totaling $99 billion.

The government sold two-year notes on Monday and will sell seven-years on Wednesday. The auctions settle on March 31.

While the two-year auction produced a “tail,” meaning the auction yield was higher than the simultaneous open-market yield, traders do not expect the phenomenon to be repeated at the five-year note sale.

“With the extreme market volatility, today’s auction is a wild card,” said Justin Lederer, fixed-income rates strategist at Cantor Fitzgerald in New York.

In when-issued trade, the five-year notes to be sold at the Tuesday auction yielded 2.245 percent. Traders have said a yield of 2.25 percent could attract good demand.

“On one hand, there is a risk that many will not bid as aggressively; setups are not as strong, and many investors see the Fed’s current accommodative policies close to the finish line,” Lederer said, noting that Cantor does not expect the first Fed interest rate hike until late 2012.

“On the other hand, we cannot discount the vast global uncertainties which continue to make front page news and could materialize into a safety bid at any time,” he said.

Though the five-year yield is now almost 40 basis points above where it was in mid-March, the Treasury market “continues to have a tough time finding major support,” Lederer said.

Benchmark 10-year Treasury notes slipped 7/32, their yields rising to 3.47 percent from 3.44 percent on Monday.

Other strategists said demand for five-year notes from domestic money managers could be strong and that cash from recent currency intervention activities by the Bank of Japan could also support the bid, though the same view prevailed — but did not materialize — at the two-year sale on Monday.

St. Louis Federal Reserve President James Bullard said in Prague on Tuesday that the Fed’s $600 billion asset purchase program, designed to spur lending and the economy, could be trimmed by some $100 billion. Bullard, who not a voting member of the Fed’s policy committee this year, acknowledged that Fed policy makers differ on when it is safe to begin tightening monetary policy.

In contrast, Chicago Federal Reserve Bank President Charles Evans, who does have a vote on policy, said on Friday that higher U.S. gas and food prices were unlikely to trigger a broad rise in costs that would force the Fed to reverse its accommodative monetary stance. He also said the Fed should complete its planned $600 billion in bond purchases, but probably does not need to buy additional bonds to support the economy.

On the economic data front, The Conference Board’s consumer confidence index, to be released on Tuesday, is expected to read 65.0 for March, down from 70.4 in February.

(Editing by Leslie Adler)

Modest price cuts for bonds before 5-year auction