* U.S. Treasury to sell $32 billion two-year notes
* Smallest monthly two-year auction in over five years
* Fed buys $5.08 billion government bonds due 2017-2018
By Richard Leong
NEW YORK, Oct 28 (Reuters) - U.S. Treasuries prices were
unchanged on Monday as investors prepared to make room for this
week's $96 billion in longer-dated government debt supply with
yields hovering near three-month lows.
Bond prices recouped much of their initial decline on light
trading volume after surprisingly weak data on pending domestic
home sales, reviving some safe-haven bids for bonds. The figures
suggested the housing recovery was losing momentum from this
summer's spike in mortgage rates even before this month's 16-day
partial government shutdown.
Analysts, however, downplayed the market's reception to the
disappointing housing report.
"It's hard to read into the data in the next month or two.
They're so skewed," said Justin Lederer, Treasury strategist
with Cantor Fitzgerald in New York.
The Treasury Department will kick off this week's auctions
of coupon-bearing issues with a $32 billion offering of two-year
notes at 1 p.m. (1700 GMT). This is the smallest monthly supply
of this maturity since August 2008.
The government began reducing the size of its two-year
auctions in August as a result of lower borrowing needs and in
preparing to introduce two-year floating-rate debt in early
The two-year auction will be followed by a $35 billion sale
of five-year notes on Tuesday and a $29 billion auction in
seven-year notes on Wednesday.
Traders and analysts anticipated solid demand for the latest
supply due to expectations the Federal Reserve will likely stick
to its current pace of bond-purchase stimulus to support an
economic recovery weakened by the recent 16-day partial
"The prevalent opinion of the market is the Fed is on hold
with tapering until 2014," said Mike Cullinane, head of
Treasuries trading at D.A. Davidson at St. Petersburg, Florida.
"This week's supply should be well-received."
Fed policymakers will meet on Tuesday and Wednesday. They
surprised investors last month when they refrained from
reducing their $85 billion monthly purchases of Treasuries and
mortgage-backed securities, or QE3. The decision spurred a bond
market rally, helping send the 10-year yield down some 50 basis
points from a 25-month high of 3 percent.
The Fed bought $5.08 billion of Treasuries maturing Oct.
2017 to June 2018 as its latest QE3 purchase.
With the Fed likely to assure investors that the current QE3
purchases will stay in place in coming months, traders and
analysts said benchmark yields will likely bounce within a tight
range, at least until the next non-farm payrolls report, due on
"This lends itself to a rangebound market," said Cullinane,
who expects the 10-year yield to trade 2.45 to 2.65 percent in
the near term.
The government has released economic data that were delayed
due to the shutdown after President Barack Obama and Congress
reached a last-minute deal on Oct. 16 to temporarily fund
federal spending and raise the debt ceiling through early 2014.
U.S. factory output grew 0.6 percent in September, its
largest monthly increase since February, the Fed reported on
On the open market, 10-year Treasury notes were
unchanged in price at 99-31/32 to yield 2.503 percent after
falling as much as 7/32 with a yield of 2.537 percent. The
10-year yield touched a three-month low of 2.471 percent last
week after disappointing September jobs figures.
In "when-issued" activities, traders expected the
forthcoming two-year note issue due in October
2015 was expected to clear at a yield of 0.3240 percent. This
compared with a yield of 0.348 percent at the two-year auction
held in September.