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TREASURIES-U.S. bond prices steady before 3-year note auction
April 9, 2013 / 1:33 PM / 5 years ago

TREASURIES-U.S. bond prices steady before 3-year note auction

* U.S. Treasury to sell $32 bln 3-year note supply
    * U.S. Fed to buy $1.25-$1.75 bln long-dated bonds
    * Bullard says Fed has still room to buy more bonds
    * Thirty-year swap spread widens, approaches zero

    By Richard Leong
    NEW YORK, April 9 (Reuters) - U.S. government debt prices
were steady to higher on Tuesday in advance of a $32 billion
auction of a new three-year note issue, which was the first part
of the $66 billion in total supply of longer-dated debt this
week.
    Benchmark yields held at their short-term chart supports
after they failed to climb back to levels prior to the release
of the government's dismal payrolls report last Friday.
    The U.S. bond market remained supported by bets in
anticipation of heavy purchases from Japanese insurers and
pension funds as they seek higher-yielding debt overseas after
the Bank of Japan's plan to double its monthly asset purchases
in a bid to stimulate its sluggish economy.
    Last week's batch of weaker-than-expected data on jobs and
business activity added safehaven bids for Treasuries, whose
yields fell to their levels lowest of the year on Friday.
    Still the bond market rally stalled on the perception that
it was overdone for now and the expected buying from Japan has
not materialized, analysts and traders.
    "We ran ahead too far too soon and we still have supply to
deal with," said Thomas Roth, executive director of U.S.
government bond trading at Mitsubishi UFJ Securities USA in New
York.
    In "when-issued" activity, traders expected the upcoming
three-year note issue to yield 0.3450 percent,
lower than the 0.411 percent yield at last month's three-year
auction. 
   After the three-year note sale at 1 p.m. (1700 GMT), the U.S.
Treasury Department $21 billion in 10-year notes on Wednesday
 and $13 billion in 30-year bonds on Thursday
.
 
    On the open market, benchmark 10-year Treasury notes were up
2/32 in price at 102-12/32, yielding 1.738 percent, down 0.7
basis point from late on Monday.
    Bond prices bounced up from their earlier lows, partly on
comments from St. Louis Federal Reserve President James Bullard
who told CNBC television that the U.S. central bank still has
more room to buy bonds to help support the economic recovery.
    The Fed was set to buy $1.25 billion to $1.75 billion in
government bonds that mature in Feb. 2036 to Feb. 2043 at 11
a.m. (1500 GMT). 
    The 10-year yield briefly broke above its 200-day moving
average of 1.7431 percent, according to Reuters data. It also
retraced 50 percent of last week's decline due to buying spurred
by Bank of Japan's $1.4 trillion stimulus plan and the payroll
report that showed a stunning weak 88,000 job gain in March.
    In the derivatives market, the spread on U.S. 30-year
interest swap rate over 30-year Treasury bond yield crept closer
to closer to zero in early trading. 
    This measure of the difference between long-term U.S.
borrowing costs and private borrowing costs has been stuck in
negative territory more than four years.
    This widening of the 30-year spread has been fueled by
speculation that some dealers must close out their current
30-year swaps, which they use to hedge investments known as
power reverse dual current notes (PRDC) they sold to investors.
    The appreciation of the yen against U.S. dollar had led
dealers to hold 30-year swap positions to ensure cash flows to
pay PRDC investors, but the rapid weakening of the yen due to
BoJ's aggressive easing stand has spurred bets dealers will exit
these long-dated swaps.

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