US debt prices fall ahead of 10-year auction

NEW YORK: US Treasury prices slipped on Tuesday ahead of a 10-year note auction as stocks edged higher in the United States and Europe, reversing some of the previous day's flight-to-safety buying.

The selling, despite a weak Italian bond auction earlier in the day, appeared driven mostly by preparation for a 1 p.m. auction of $21 billion in 10-year notes.

"You've got kind of a turn away from the flight-to-quality bid, and all of a sudden you've got to bid on 10-year notes at one o'clock, so 10s and 30s are leading prices lower," said Richard Gilhooly, interest rate strategist at TD Securities in New York.

Benchmark 10-year notes, were last trading 9/32 lower in price and yielding 1.99 percent, up from 1.95 percent at Monday's close.

Raymond Remy, a trader at Daiwa Securities, said he expected better demand at the auction if the 10-year yield returns above 2 percent in pre-auction trading.

The 10-year is set to break a record low in auction yield, anyway, beating the previous record of 2.14 percent set at last month's auction.

Activity in the Treasury market was light, however.

"Volumes are a bit depressed this morning. We've seen Treasuries stabilize in a range so there isn't a lot of action going on," said Gennadiy Goldberg, fixed income strategist at 4Cast Inc.

He identified the next technically important level in the benchmark 10-year yield as 1.90 percent, if prices were to rally further.

"It's risk-on, risk-off so quickly that people have been sitting on the sidelines for the past week or so," he said.

The Treasury Department is preparing to sell $21 billion in re-opened 10-year notes at 1 p.m. (1700 GMT) in the second of three auctions scheduled this week.

Justin Lederer, interest-rate strategist at Cantor Fitzgerald in New York, said buyers would be wary.

"Most (traders) will be extremely cautious in their setups ahead of 1 p.m. given the potential for breaking news at any point and a safe-haven bid materializing, especially near the European close," he wrote in a note to clients.

Thirty-year bonds fell 25/32 in price to yield 3.29 percent, up from 3.25 percent late on Monday.

Copyright Reuters, 2011