TREASURIES-Modest price cuts for bonds before 5-yr auction

* 5-year notes set for auction seen cheap on the curve

* 2.25 pct yield would make 5-years attractive -traders

* Difference between 5-, 7-year yields smallest in a month

* 5-year yields up for 8th straight session

By Ellen Freilich

NEW YORK, March 29 (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

The Treasury will sell $35.0 billion in five-year notes at
1 p.m. ET (1700 GMT), 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 (1700 GMT) 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 (US10YT=RR: Quote, Profile, Research) slipped 7/32,
their yields rising to 3.47 percent from 3.44 percent on

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

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)

TREASURIES-Modest price cuts for bonds before 5-yr auction