TREASURIES-Market ends mixed as 30-year bond auction draws buyers

Reuters

* Strong 30-year bond auction lifts prices

* Fed bought $1.38 billion in TIPS due 2028-2043

* Market focuses on efforts to raise debt ceiling

By Ellen Freilich

NEW YORK, Oct 10 (Reuters) - U.S. Treasuries ended mixed on

Thursday after strong demand for a 30-year Treasury bond sale

erased most early losses.

Meanwhile, the outlook for a deal on raising the U.S. debt

ceiling remained uncertain, giving the bond market little

direction.

Republicans said they would offer President Barack Obama a

short-term increase in the federal debt limit if he would agree

to negotiate with Republicans on a broad range of fiscal issues,

including funding to reopen the government.

Prices began the day even lower, but the low prices and

higher yields drew buyers to the Treasury's $13 billion 30-year

bond auction and prices rose from the day's lows.

"The bond auction was well bid for at the bidding deadline

and very decent demand from real money accounts carried the

auction to better levels," said Thomas di Galoma, co-head of

fixed income rates at ED&F Man Capital in New York.

Treasuries had traded weaker before the auction and built in

a concession, said Ian Lyngen, Treasury strategist at CRT

Capital Group in Stamford, Connecticut. Prices bounced from the

lows following the sale.

An elusive U.S. debt-ceiling deal also boosted the appetite

for liquid U.S. debt.

While failing to raise the debt ceiling could trigger a

default on U.S. Treasury debt coming due in the near future,

anxiety about such an event prompts a liquidity bid for U.S.

debt farther out on the maturity curve, tending to raise the

price of U.S. debt and put downward pressure on yields.

That has led to the short end of the yield curve inverting

since yields on U.S. debt due the soonest must compensate for

the risk of late payment.

Selling picked up in overnight trading after Treasuries

yields broke above their recent support levels. But it tapered

off before the 30-year bond sale on Thursday.

Benchmark 10-year notes were last down 6/32 in

price to yield 2.69 percent, still just above a recent technical

support level of around 2.68 percent.

"The strong 30-year bond auction sparked a quick wave of

short-covering, and there was additional improvement based on

having the week's supply out of the way without any

difficulties, allowing for an unwinding of some hedging related

to the auctions," said John Canavan, fixed income analyst at

Stone & McCarthy Research Associates in Princeton, New Jersey.

Thirty-year bonds erased an early, pre-auction

loss and were up 5/32 in late trade, yielding 3.73 percent.

Besides the 30-year bonds sold on Thursday, the Treasury

sold three-year notes on Tuesday and 10-year notes on Wednesday.

Treasuries have largely traded sideways for the past two

weeks, with many investors reluctant to enter new trades due to

the political stalemate in Washington.

The U.S. government entered its 10th day of partial shutdown

on Thursday and fears have been rising that the political

conflict could keep the debt ceiling from being raised and lead

to a default on some short-term U.S. debt, an event that would

undermine needed confidence in a benchmark asset to which all

other financial markets are connected.

"Bonds sold off a bit while equities and credit rallied all

on the idea of some deal happening 'soon,'" said Jack Flaherty,

investment director at GAM USA Inc in New York.

"Then Treasuries moved up from the lows on talk that made a

deal look farther off than it seemed in the morning," he said.

Flaherty called the fluctuations "a lot of noise.

"A debt deal will get done and rates will go back up. It's a

matter of when, not if. But maybe the markets' complacency isn't

putting enough pressure on the politicians in D.C," he said.

The current on-the-run one-month Treasury bill yields

, which mature on November 7, traded at 0.25 percent

on Thursday, below a five-year high of 0.36 percent on Tuesday.

The cost to finance overnight trades backed by Treasuries in

the repurchase agreement market also shot higher on Thursday,

opening at around 27 basis points before falling back to around

10 basis points, said traders.

Banks and money funds have begun to stipulate that they will

not accept Treasuries at risk of delayed payments to back repo

loans.

The Federal Reserve bought $1.38 billion in Treasury

Inflation-Protected Securities (TIPS) due from 2028 to 2043 on

Thursday as part of its ongoing purchase program.

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