February 13, 2009 / 4:42 PM / 11 years ago

TREASURIES-Bonds fall with continued supply worries

*Supply concerns weigh on bonds

*10-yr yields set for biggest weekly dip this year

*Investors cautiously turn to riskier assets (Adds analyst comment, updates prices)

By Chris Reese

NEW YORK, Feb 13 (Reuters) - U.S. Treasuries fell on Friday on worries an expected flood of new debt from the government will heavily dilute the market, even though this week’s quarterly refunding auctions were generally seen as a success.

Trade was quiet, however, with a thin data calendar and an abbreviated session, with some investors happy to step to the sidelines after a week of volatile trade.

Even with the lower prices on Friday, benchmark yields, which move inversely to prices, were on track for their biggest weekly fall so far this year in relief that the Treasury refunding had gone as well as it had.

But supply concerns remained, with the government expected to issue more and more debt to fund various rescue plans for the financial industry.

“There is speculation that we are going to see a larger (government) package than we thought we were going to see, including subsidies, and that is weighing on the market,” said Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co. in New York.

The widening scope of such measures was evident in news on Thursday that the Obama administration is working out a program to subsidize mortgage payments for troubled homeowners.

Benchmark 10-year notes US10YT=RR were trading 15/32 lower in price for a yield of 2.84 percent, from 2.79 percent late on Thursday, while two-year notes US2YT=RR were unchanged in price for a yield of 0.93 percent.

Some analysts had worried that demand for government securities might be tepid given expectations of the huge wave of debt supply this year. While an auction of 30-year bonds on Thursday was met with a bit of a lukewarm reception, auctions of three-year notes and 10-year notes on Tuesday and Wednesday were generally seen as successful.

Treasuries were also weighed on Friday as investors cautiously turned to riskier investments like corporate debt, which sapped the safe-haven bid for government debt.

“Everybody is in the Treasury market because they don’t want to be in any other asset class, and to the extent that people are willing to stick their heads out and look for greener pastures, that would be a drain on Treasury demand and a boost to Treasury yields,” said William O’Donnell, head of U.S. interest rate strategy at UBS Securities LLC in Stamford, Connecticut.

Bond prices were also not helped by news that a Chinese official said that buying U.S. Treasuries was not the only option for his country’s central bank, contradicting an earlier comment.

Treasuries briefly pared losses after the Reuters/University of Michigan Surveys of Consumers showed consumer confidence fell to its lowest in three months in February. For details see [ID:nN13275765].

The U.S. bond market will shut early at 2 p.m. Eastern time (1900 GMT) on Friday and stay closed on Monday for the Presidents Day holiday. (Reporting by Chris Reese; Editing by Dan Grebler)

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