TREASURIES-Prices drop, yields back up ahead of auction

* Prices fall, yields rise ahead of 5 yr auction

* 5-yr yields trade at concession in “when-issued” market

* Fed will buy $6-$8 billion in debt due 2013, 2014
(Adds comment, updates prices)

By Karen Brettell

NEW YORK, Dec 28 (BestGrowthStock) – U.S. Treasury prices fell on
Tuesday as dealers and traders built a discount into the debt
ahead of a $35 billion auction of new five-year notes that
could see weak demand in thin trading.

Traders believe the new debt is likely to price at a
discount at the auction as trading desks remained thinly
staffed due to the holidays and as the U.S. Northeast digs out
of a winter snowstorm.

“The extremely illiquid conditions continue this morning as
the looming year-end, holiday in Europe and yesterday’s
northeast blizzard have all affected the markets,” analysts at
Cantor Fitzgerald said in a note to clients.

“The major downside risk for today’s auction is the
illiquid market conditions … which are definitely playing a
large part in the selling over the past hour,” they said.

Five-year notes (US5YT=RR: ) were last down 11/32 in price to
yield 2.10 percent. Five-year notes in the “when-issued” market
(US5YTWI=TWEB: ), which indicates where traders expect the new
debt to price, traded at yields of around 2.14 percent.

The Treasury will auction the five-year notes at 1 p.m. EST
(1800 GMT). It also plans to sell $29 billion in seven-year
notes on Wednesday.

Seven-year notes (US7YT=RR: ) dropped 16/32 to yield 2.80
percent. Benchmark 10-year notes (US10YT=RR: ) also fell 18/32 in
price to yield 3.41 percent.

Thirty-year bonds (US30YT=RR: ), which have been the most
volatile Treasuries, fell 1-4/32 to yield 4.47 percent.

Prices were buoyed Monday after an auction of new two-year
notes came in better than many had expected. That sale raised
hopes that demand at other auctions this week would also be
strong.

Some analysts, however, attributed Monday’s strong auction
and late-day rally to short-covering as investors squared
positions for the year-end, saying the success of the auction
may not necessarily bode well for prices for the coming weeks.

“We would not read too much into the good auction results,
as the post-auction firmness is likely to be only temporary and
we could see some renewed selling of the front end in the New
Year,” Morgan Stanley analysts said in a report.

In a note to clients on Tuesday, George Goncalves, head of
U.S. rates strategy at Nomura Securities in New York, also
pointed to concerns among market participants that foreign
buyers, typically a large source of demand for five-year notes,
were losing interest in Treasuries.

“We believe that much of these worries are unwarranted,” he
said. “Although foreign central banks slowed down the pace of
their Treasury purchases recently, there is little suggesting
further sustained selling in the works.”

A possible support to the market, however, may come from
Federal Reserve bond purchases that resume on Tuesday. The U.S.
central bank will buy between $6 billion and $8 billion of
notes maturing in 2013 and 2014 on Tuesday, and $4 billion to
$6 billion of debt maturing in 2012 and 2013 on Wednesday.
(Additional reporting by Emily Flitter; editing by Jeffrey
Benkoe)

TREASURIES-Prices drop, yields back up ahead of auction