* Incoming supply, Fed rate hike prospects limit yield decline
By Sam Forgione
NEW YORK, July 6 (Reuters) - Benchmark U.S. Treasury yields hovered near their lowest in over two weeks on Monday on safe-haven demand, a day after Greeks overwhelmingly rejected conditions of a rescue package from creditors, raising expectations of a Greek exit from the euro zone.
Stunned European leaders called a summit for Tuesday to discuss their next move after the surprisingly strong victory by the ‘No’ camp on Sunday defied opinion polls that had predicted a tight contest.
Yields hit session lows shortly after the results of Sunday’s referendum. Benchmark 10-year Treasury yields hit 2.274 percent, their lowest in over two weeks, while long-dated yields hit their lowest in nearly one week at 3.088 percent and two- and three-year yields hit respective seven-week lows of 0.566 and 0.909 percent.
“The odds have risen of a Greek exit, and with it bond prices,” said William O’Donnell, managing director and head of US Treasury strategy at RBS Securities in Stamford, Connecticut. Yields move inversely to prices.
“Treasuries are a good place to be as we go through what could be a critical couple of days,” O’Donnell said.
Yields on Treasuries hit session highs after data showing the pace of growth in the U.S. services sector ticked higher in June after dropping to a 13-month low in May. Still, the yields remained lower on the day.
Analysts said that lingering expectations that the Federal Reserve could hike rates in September, despite a weaker-than-expected U.S. employment report for June released last week, limited the declines in shorter-dated Treasuries yields.
Shorter-dated yields are believed to be most vulnerable to Fed rate hikes, which are expected to hurt Treasuries prices.
“As long as (a September Fed rate hike) is a possibility, the very front-end of the curve is going to have a difficult time rallying,” said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York.
Analysts also said the Treasury’s auctions of $58 billion in notes this week, starting with $24 billion in three-year notes on Tuesday, also limited the decline in Treasuries yields. Traders typically sell Treasuries ahead of auctions to make room for new supply.
U.S. 10-year notes were last up 17/32 in price to yield 2.328 percent, from a yield of 2.391 percent late Thursday. U.S. 30-year bonds were last up 1-9/32 in price to yield 3.124 percent, from a yield of 3.192 percent late Thursday.
U.S. three-year notes were last up 3/32 to yield 0.958 percent, from a yield of 0.995 percent late Thursday.
Markets were closed Friday ahead of the U.S. Independence Day holiday. (Reporting by Sam Forgione; Editing by Bernadette Baum)