Bonds slip before 2-year supply, EU summit

NEW YORK: US Treasuries prices slipped on Tuesday as investors looked to the stock market and economic data for direction before an European Union summit that is expected to produce a plan to tackle the region's deepening debt crisis.

Bond dealers also reduced their bond holdings to make room for this week's $99 billion in Treasury supply, starting a two-year note sale later Tuesday.

Investors are clinging to hopes of a comprehensive strategy that would protect European banks and restructure Greek sovereign debt, but most have moved to sidelines until details come out of the Brussels meeting on Wednesday.

"It's still very choppy and the market's really walking on egg shells before the EU Summit. Most of the business seems to be need-only and it appears that most people are on the sidelines waiting for the smoke to clear," said Gennadiy Goldberg, fixed income analyst at 4Cast Ltd. in New York.

Among the latest developments in Europe, Italy's divided government failed to agree at an emergency session late Monday on raising the retirement age, one of the key economic reforms demanded by Italy's EU partners as a condition for supporting its bonds.

The early decline in bonds was mitigated on lower stock index futures.

Benchmark 10-year Treasury notes last traded down 3/32 in price for a yield of 2.25 percent, up 1 basis point from late Monday.

The 10-year yield earlier touched 2.27 percent, a couple of basis points shy of 2.29 percent set last week -- which was the highest since late August.

Treasuries and German Bunds moved in line with each other as their 10-year yield spread held steady at 117 basis points.

Shortly after 1 p.m. (1700 GMT), the US Treasury Department will announce the results its $35 billion two-year note auction.

In the "when-issued" market, traders expect these debt due in Oct. 2013 would sell at a yield of 0.3040 percent, which was above the high yield of 0.2490 percent at September's auction.

The Treasury will sell $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday.

This week's coupon note sales will raise nearly $42 billion in cash for the government after repaying $57 billion in maturing debt.

On the data front, investors will receive several economic reports including home price data from S&P/Case-Shiller and consumer confidence readings from the Conference Board.

Copyright Reuters, 2011