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TREASURIES-U.S. bond prices unchanged before two-year auction

* 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

government shutdown.

"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

Nov. 8.

"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.