TREASURIES-Plosser comments spark selling in U.S. debt

* Yield curve flattens ahead of 2yr, 5yr, 7yr auctions

* Ten-year note yields have support at 3.43 percent

* Treasury yields may rise further as real yields weaken

(Changes byline, lead, adds quote, updates price action)

By Emily Flitter

NEW YORK, March 25 (Reuters) – U.S. Treasury debt prices
slipped in light trading on Friday, pressured slightly by
traders’ reaction to hawkish comments from an FOMC member.

Charles Plosser, the president of the Federal Reserve Bank
of Philadelphia, told an audience in New York that the Federal
Reserve would have to raise rates and shrink its balance sheet
“in the not-too-distant future” in order to avoid damaging the
economy through inflation. For more, click on [ID:nDZE7DA02M]

“This is bad news for bondholders because if the Fed’s got
to sell anything off their balance sheet, yields are going to
go through the roof,” said Todd Colvin, vice president at MF
Global Securities in Chicago. “And that is why the market has
the case of the yips here.”

“What does this do for long-term lending?” Colvin said. “A
lot of negatives here, but Mr. Plosser believes that’s what’s
needed in order to avoid inflation.”

Colvin said the sell-off was muted by traders’
understanding that Plosser is a renowned hawk on the Federal
Open Market Committee, and not all voting members share his

“This is one man’s opinion right now and it’s certainly not
what we can expect at the next FOMC meeting to be discussed in
a serious manner,” Colvin said.

The sell-off pushed 10-year yields above an important
support point at 3.43 percent. Ten-year notes were last trading
9/32 lower in price and yielding 3.44 percent, up from 3.38
percent late on Thursday. It was an indication that the
Plosser-fueled sell-off, small though it was, could be the
beginning of a move to higher yields.

Marty Mitchell, chief market technician at Stifel Nicolaus
in Baltimore, said the next important point for 10-year yields
was 3.60 percent.

One sign that yields may continue to rise is that real
yields this week became less negative for first time after a
five week rally sent them to most negative levels in at least
five years.

“It definitely could be the start of yields moving higher
and taking back some of that flight to quality,” said Igor
Cashyn, interest rate strategist at Morgan Stanley in New

Real yields measure Treasury returns when adjusted for
expected inflation, and negative real yields suggest that
Treasury yields will need to rise more to account for
inflation, if current expectations prove correct.

Coming auctions could also drive yields higher as traders
prepare for them. The Treasury will sell $99 billion in
two-year, five-year and seven-year notes next week, its first
Treasury supply in three weeks.

Two-year notes (US2YT=RR: Quote, Profile, Research) were off 3/32 in price to yield
0.75 percent, up from 0.71 percent on Thursday. Five-year notes
(US5YT=RR: Quote, Profile, Research) lost 8/32 in price to yield 2.18 percent, up from
2.12 percent late on Thursday. Seven-year notes (US7YT=RR: Quote, Profile, Research) rose
9/32 to yield 2.85 percent, up from 2.80 percent.

Thirty-year bonds (US30YT=RR: Quote, Profile, Research) fell 3/32 in price to yield
4.49 percent, up from 4.48 percent late on Thursday.

The gap between yields on five-year notes and 30-year
bonds, meanwhile, compressed to 236 basis points, it lowest
level in around three weeks. The gap has strong resistance at
around 230 basis points, analysts said.

New concerns about Japan’s nuclear crisis or political
upheaval in the Middle East and North Africa could spark a new
safety bid and send yields back lower.

(Additional reporting by Karen Brettell; Editing by Andrew

TREASURIES-Plosser comments spark selling in U.S. debt