TREASURIES – Price-cutting before supply

* Prices slip ahead of Treasury auctions

* Treasury to sell 2-yr notes at 1 p.m.

* View Fed’s buying will be measured weighs

* TIPS sale was sign some think Fed can reflate economy

By Ellen Freilich

NEW YORK, Oct 26 (BestGrowthStock) – U.S. Treasuries retreated on
Tuesday as traders cut prices ahead of supply and took a more
tempered view of prospective asset purchases by the Federal
Reserve, the latter intended to avert deflation.

The Treasury will sell $35 billion in two-year notes at 1
p.m. (1700 GMT). The two-year notes to be auctioned yielded
0.40 percent in when-issued trade, less than consumer price
inflation for the last year.

“Supply this week and a general mood that quantitative
easing will be more measured” pressured Treasuries, said Thomas
di Galoma, head of fixed-income rates trading at Guggenheim
Securities in New York.

The middle of the maturity curve, which has outperformed
longer-dated issues over the last month in anticipation of Fed
purchases, bore the brunt of the selling, said John Spinello,
chief fixed-income technical strategist at Jefferies & Co.

Bonds have been trading near record low yields because the
market expects the Fed to enter the market as a major, if not
overwhelming buyer of Treasury debt, traders said.

A couple of key factors are leading to less supply of paper
in the market, while sizes of U.S. Treasury auctions steadily
shrink, supporting prices.

The Fed is expected to announce a second round of
quantitative easing — known as QE2 — consisting of
accelerated purchases of government securities after its policy
meeting on Nov. 2-3, and foreign central banks have been buying
Treasury debt with proceeds from sales of their own currency.

In addition, the deflationary forces that the Fed is
attempting to thwart favor fixed-income securities because
deflation enhances the purchasing power of those investments.

Thirty-year bonds (US30YT=RR: ) on Tuesday fell 23/32, their
yields rising to 3.95 percent from 3.91 on Monday.

Benchmark 10-year Treasury notes (US10YT=RR: ) fell 10/32,
its yield rising to 2.61 percent from 2.56 percent on Monday.

Traders cited technical resistance between 2.555 percent
and 2.53 percent on the 10-year yield and support between 2.61
percent and 2.645 percent.

Economic data due during the session include the Conference
Board’s measure of consumer confidence.

The Fed on Tuesday will buy Treasuries with maturities
ranging from 2021 to 2040 with slightly more than the $2.2
billion purchased in the last purchases in this maturity,
Spinello said.

The Fed has been buying Treasuries with the proceeds of
maturing assets that it bought during its first round of
quantitative easing.

The sale of five-year inflation-protected Treasury bonds on
Monday with a negative yield showed that some investors believe
the Fed’s second phase of quantitative easing will succeed in
spurring some inflation.

The securities fetched a negative yield for the first time
ever, implying investors are willing to pay the government to
own its debt. For details see [ID:nN25277926].

“Good participation” in the TIPS auction came from the camp
who believe policymakers will succeed in reflating the economy
in the years ahead, Spinello said.

(Editing by Chizu Nomiyama)

TREASURIES – Price-cutting before supply