August 13, 2014 / 2:08 PM / 3 years ago

TREASURIES-Bond yields fall on weak data before 10-year supply

* Safe-haven bids persist on tension in Gaza, Iraq and Ukraine

* U.S. retail sales flat in July, miss forecast of modest growth

* U.S. 10-year supply seen selling at lowest yield since June 2013

By Richard Leong

NEW YORK, Aug 13 (Reuters) - U.S. Treasury debt yields fell on Wednesday as disappointing data on U.S. retail sales revived bets the Federal Reserve might leave policy rates near zero for a longer period in a bid to keep the economic recovery on track.

The decline in bond yields was limited ahead of a $24 billion auction in 10-year notes at 1 p.m. (1700 GMT) and Thursday's $16 billion sale of 30-year bonds, which some traders reckon might not fetch strong demand due to their low yields.

"The knee-jerk reaction to the retail sales data was disappointment. You see bonds rallying a bit," said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee.

In early U.S. trading, the yield on benchmark 10-year Treasuries was 2.427 percent, down 1.5 basis points from late on Tuesday, while the two-year yield was 0.424 percent, down 1.2 basis points. The five-year yield was 1.599 percent, down 1.6 basis points.

Bond yields were higher overnight on overseas selling before the news that American spending at stores and gas stations did not grow in July. Economists polled by Reuters had projected a 0.2 percent gain.

The selling pressure from this week's $67 billion in government bond supply has been offset by a steady bid for safe-haven Treasuries on worries about conflicts in Iraq, eastern Ukraine and Gaza. Ten-year yields have not strayed far above last week's 14-month low of 2.349 percent.

In the 'when-issued' market, the upcoming 10-year note issue due August 2024 was quoted to sell at a yield of 2.450 percent , which would be the lowest since June 2013.

In addition to government supply, investors have bought $14.1 billion in new investment-grade corporate bonds the past two days, which was the bulk of the $15 billion to $20 billion in supply in that sector expected this week, according to IFR, a unit of Thomson Reuters.

As traders prepared for the rest of this week's bond supply, they have kept an eye on developments abroad and whether conditions might worsen and become a drag on the global economy.

Ukraine denounced Russia's aid convoy heading for its eastern border, a move which Kiev and the West see as a pretext for an invasion of that region.

Meanwhile, Israelis and Palestinians have not reached a deal to end a month-long war in Gaza as a three-day ceasefire comes to a close.

The Federal Reserve at 11 a.m. (1500 GMT) plans to buy $350 million to $450 million in Treasury Inflation-Protected Securities, the latest transaction in its bond purchase program that is expected to wind down in October. (Reporting by Richard Leong; Editing by James Dalgleish)

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