U.S. government debt prices rise

NEW YORK: U.S. government debt prices rose on Tuesday in anticipation of lower supply from the Treasury, with benchmark yields poised to test key resistance levels set in mid-March.

Fuelling the bullish bets in bonds were expectations of a reduction in supply after the Treasury Department trimmed its borrowing estimates for the current quarter by more than half, to $142 billion, citing higher receipts and lower outlays.

The Treasury will announce the size of its May refunding on Wednesday. Analysts predict the refunding size might be reduced by up to $3 billion based on the Treasury's latest borrowing projection. The quarterly refund total $72 billion.

While the backdrop for bonds remains bullish, the market appears overbought in the near term and faces risk of selling pressure from investors and primary dealers who will clear space for next refunding supply, analysts said.

"The most likely event into next week is consolidation," said Larry Dyer, head of U.S. rates strategist at HSBC Securities USA in New York.

Technical indicators "are giving us a neutral signal. The risk of lower yield is easier to justify than a buyer strike," Dyer said.

Benchmark 10-year notes traded up 7/32 in price to yield 3.26 percent, down from 3.28 percent late on Monday. This is just above the 3.25 percent level last seen in mid-March during a safe-haven rally after a devastating earthquake and tsunami hit Japan.

If the 10-year yield pierces that resistance level, it will likely test a key retrenchment level at 3.22-3.23 percent, then psychological support at 3.20 percent, analysts said.

Thirty-year Treasury bonds traded 10/32 higher with a yield of 4.36 percent versus 4.38 percent on Monday.

The bullish run for Treasuries should continue, as U.S. money managers have raised their allocation in bonds, according to a Reuters poll.

Based on 15 U.S.-based fund management firms, with total assets under management of about $2.8 trillion, the poll found they held 29 percent of their assets in bonds in April, up from 27 percent a month ago.