TREASURIES-Price cuts before Treasury 5-yr note auction

* Price-cutting before $35 bln 5-yr Treasury note auction

* Supply comes before another expected round of Fed easing

* Size and pace of purchases by Fed uncertain

* Debate over whether Fed will be able to reflate economy

By Ellen Freilich

NEW YORK, Oct 27 (BestGrowthStock) – U.S. Treasuries prices slipped
on Wednesday as traders cut prices before the third sale of
U.S. government debt this week and debated the scope of the
Federal Reserve’s next round of monetary easing.

The government will sell $35 billion in five-year notes at
1 p.m. (1700 GMT) after good demand emerged, as expected, for
the Treasury’s sale of two-year notes on Tuesday. The Treasury
will auction seven-year notes on Thursday.

Doubt about the aggressiveness of the Fed’s next asset
purchases hurt bond prices.

But data on new home sales and business spending released
during the session argued aggressive easing was needed.

The Fed is expected to outline its asset purchase program
after the U.S. central bank’s policy meeting Nov. 2-3,

Robert Tipp, chief investment strategist at Prudential
Fixed Income in Newark, New Jersey, said bond investors had
gotten very optimistic about an aggressive Fed easing program
and then had some second thoughts.

“But at the end of the day, I would guess the sell-off
(would) run out of steam between now and next week,” he said.

Benchmark 10-year Treasury notes (US10YT=RR: ) were down 8/32
in price at midday, their yields at 2.68 percent, after rising
to 2.70 percent earlier in the session, the highest in over a
month and up from from 2.65 percent late on Tuesday.

Bond and stock prices reflect the debate over whether the
Fed can pull the economy back from deflation.

When bonds rally and stocks sink, investors are showing a
lack of confidence in an economic resurgence.

The conviction that the economy will recover, or reflate,
and produce employment, would push stocks up and weaken bonds,
pushing Treasury yields higher.

Bill Gross, manager of the world’s largest bond fund at
Pacific Investment Management Co., said a resumption of asset
purchases by the Federal Reserve would likely signify the end
of the “great” 30-year bull market in bonds.

“The Fed’s announcement will likely signify the end of a
great 30-year bull market in bonds and the necessity for bond
managers and, yes, equity managers to adjust to a new
environment,” Gross wrote in his monthly outlook posted on
Newport Beach, California-based Pimco’s website on Wednesday.

The Fed has already spent $1.7 trillion in large-scale
asset purchases to bolster lending and the economy and some
analysts say that, over time, it could buy up to another $2
trillion in assets.

“The Treasuries selloff you’ve seen over a multiday period
has really just been positioning of the market,” said Chris
Diaz, co-manager of the ING Global Bond Fund, part of the $110
billion in fixed-income assets that ING manages in the U.S.

“The market was very long and we saw some rebalancing of
positions,” he said. “We haven’t backed up that much; it’s just
a squaring of positions.”

Diaz said traders felt comfortble buying duration as it
became more and more clear that another program of quantitative
easing would be announced at next week’s Fed meeting.

“Amid the excitement about impending QEII, all indications
showed that everybody was on the same side of the trade,” Diaz
said. “If all the buyers are gone, and you only have sellers,
then prices will go down and yields up.”

As market participants have tried to figure out the shape
of the monetary easing to come, expectations have centered
around an initial commitment to buy at least $500 billion in
Treasury debt over five months to spur lending and support an
economic recovery that is too weak to boost employment.

Fed officials, too, have outlined a range of views, with
some pushing for aggressive stimulus and others sounding
skeptical of additional accommodation. [ID:nN25168493]

Thomas di Galoma, head of fixed-income rates trading at
Guggenheim Securities in New York, said those who think the
next round of Fed easing won’t live up to its advance billing
are not taking into consideration the weight that Fed Chairman
Ben Bernanke’s dovish views will carry with the board.

“(Bernanke) will persuade them toward $1.5 to 2 trillion in
total QE2 (quantitative easing) program,” he said. “This looks
like another buying opportunity in bonds.

“The bottom line is U.S. rates will stay low for years to
come as most have misjudged the deflationary environment we are
in, which will keep inflation prospects quite low,” he said.

In when-issued trade, the $35 billion in five-year notes to
be sold at 1 p.m. (1700 GMT) yielded 1.33 percent, a more
appealing yield than the 1.25 percent offered on Tuesday and
above the high yield of 1.26 percent at which five-year notes
were sold in September.

Thirty-year bonds (US30YT=RR: ) fell 6/32 in price, after a
steeper fall on Tuesday. Their yields rose to 4.01 percent from
4.00 percent on Tuesday.

The 30-year Treasury bond has underperformed shorter
maturities as policymakers have stepped up their discussion of
further monetary ease on the assumption the Fed would buy
maturities in the mid-range, or belly, of the curve.
(Additional reporting by Emily Flitter; Editing by Kenneth

TREASURIES-Price cuts before Treasury 5-yr note auction