TREASURIES-Bonds cheapen ahead of two-year auction

* Treasury two-year note auction to go on as planned

* Two-yr notes breach technical support at 0.70 pct yields

* Auction seen pricing at concession
(Adds comment, updates prices; dateline previously LONDON)

By Karen Brettell

NEW YORK, Dec 27 (BestGrowthStock) – U.S. Treasury debt prices
weakened on Monday, and two-year note yields broke above recent
technical supports as dealers set up for a $35 billion auction,
which analysts expect will need to price at a concession to
generate interest.

The U.S. Treasury Department said earlier on Monday the
last two-year note sale of the year would proceed, after some
traders had speculated the auction might be delayed because of
a storm that blanketed the Northeast, including New York, in
snow.

The storm left many trading desks sparsely staffed, and
dealers were also seen to be hesitant to take on much new debt
as they close their books for year-end.

“It’s very thin dealing conditions,” said William
O’Donnell, head of U.S. Treasury strategy at RBS Securities in
New York.

“I think it’s going to be another typical December auction,
and that is a disappointingly weak bid-to-cover ratio as many
dealer balance sheets are contained and at the same time a lot
of people aren’t even in to begin with,” he said.

Two-year notes (US2YT=RR: ) dropped 04/32 in price to yield
0.73 percent, the highest level since June, after breaking
through recent support levels at around 0.69 percent to 0.70
percent. The next support is around the 0.80 percent area, said
O’Donnell.

The two-year note yields also traded at 0.76 percent in the
“when-issued” market (US2YTWI=TWEB: ) on Monday, which is where
traders expect the new debt may trade. The auction is scheduled
for 1 p.m. (1800 GMT).

Intermediate-dated debt was also among the worst performing
notes on Monday, with five-year notes (US5YT=RR: ) falling 09/32
in price to yield 2.2 percent while benchmark 10-year notes
(US10YT=RR: ) dropped 09/32 to yield 3.43 percent.

The Treasury also plans to sell $35 billion in five-year
notes on Tuesday and $29 billion of seven-year notes on
Wednesday.

David Ader, head of government bond strategy at CRT Capital
in Stamford, Connecticut, said there was little to support
Treasuries on Monday.

“We have a smaller audience than we otherwise would have
had because of the weather, no key data, no Federal Reserve
speakers,” he said.

Bond purchases from the Federal Reserve’s $600 billion
buying program are also not scheduled to resume until Tuesday,
when the U.S. central bank will buy between $6 billion and $8
billion of notes due 2013 and 2014.

One positive for the market is data that showed foreign
central banks have recently increased their buying of U.S.
government debt, said O’Donnell of RBS.

According to Federal Reserve data released on Thursday,
overseas central banks’ holdings of Treasury debt rose by
$13.08 billion in the most recent week to stand at $2.625
trillion. For more, see [ID:nNLLNNE6QQ]

“That is a developing positive that should help support the
Treasury market ultimately,” said O’Donnell.
(Additional reporting by Emily Flitter in London; Editing by
Leslie Adler)

TREASURIES-Bonds cheapen ahead of two-year auction