Prices pared ahead of 3-year note auction

By Chris Reese

NEW YORK (Reuters) – U.S. Treasury debt prices eased Tuesday as investors set up for an auction of $32 billion of three-year notes and with strength in stocks sapping at Treasuries’ safe-haven allure.

Investors are also looking ahead to a talk on the U.S. economic outlook from Federal Reserve Chairman Ben Bernanke in the afternoon, when particular attention will be paid to whether the central bank chief hints at the potential of further economic stimulus in the form of Treasuries purchases.

Tuesday’s three-year note auction will kick off this week’s $66 billion of U.S. government debt sales, with the Treasury set to also sell $21 billion of reopened 10-year notes Wednesday and $13 billion of reopened 30-year bonds Thursday.

“There has been a little bit of a setup ahead of the auctions this week and today, and stocks are looking like they might post some gains,” said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

Benchmark 10-year Treasury notes were trading 11/32 lower in price to yield 3.04 percent, up from 3.00 percent late Monday. Still, the dip in prices lifted yields only marginally from the six-month lows hit last week, when benchmark rates touched 2.94 percent, or the lowest since early December.

Rates have been pushed lower by evidence, including last week’s monthly jobs report for May, that the economic recovery is struggling. Worries over the eventual outcome of debt problems in Europe have also underpinned Treasuries.

An absence of top-tier economic data this week gave investors a little room to take profits from the recent run up in prices.

“The tendency will be to move higher (in yield) from the richest levels that we have seen since early December, but again we are in a really uncertain environment — there is a lot of risk out there and it won’t take much in terms of another downdraft in equities, for whatever reason, to give Treasuries another boost,” Rupert said.

With the Fed’s latest $600 billion Treasuries purchase program, known as QE2, set to expire at the end of this month, investors are keen to know whether Bernanke and the U.S. central bank are contemplating any QE3-type further stimulus. Bernanke will speak in Atlanta on the economic outlook at 3:45 p.m. Eastern time .

Expectations were low however for much of a market-moving event.

“The end of QE2 and the official stance on its completion is old news, and we do not expect the chairman will venture an opinion on QE3, other than to leave the door open to any eventuality,” said Ian Lyngen, government bond strategist at CRT Capital Group in Stamford, Connecticut.

“On net, we expect Bernanke’s comments hold more disappointment potential than bullish risk and add to our bias for continued backup in rates for supply,” Lyngen said.

As part of the QE2 program, the Fed is scheduled Tuesday to buy $1 billion to $2 billion of Treasury inflation-protected securities maturing April 2013 through February 2041.

Ahead of that, two-year notes were trading unchanged in price to yield 0.44 percent, while 30-year bonds were 19/32 lower in price to yield 4.30 percent, up from 4.26 percent late Monday. (Editing by )