December 28, 2017 / 7:12 PM / a year ago

TREASURIES-Prices dip, moderate demand at seven-year auction

 (Adds auction results, quotes; Updates prices)
    * U.S. sells $28 bln seven-year notes
    * Month-end extension buying ebbs
    * Bond market to close early on Friday

    By Karen Brettell
    NEW YORK, Dec 28 (Reuters) - U.S. Treasury prices dipped on
Thursday, giving back some of Wednesday’s strong month-end
extension rally, after the Treasury Department sold $28 billion
of seven-year notes to moderate demand.
    Benchmark 10-year note yields fell as low as 2.407 percent
on Wednesday, from 2.479 percent, as investors sought to extend
the duration of their bond portfolios before year-end.
    “A lot of this month-end buying is getting done before the
actual month-end,” said Tom di Galoma, a managing director at
Seaport Global Holdings in New York. “There is so much duration
that needs to be bought at month-end and markets are very thin.”
    The 10-year yields             rose back to 2.436 percent on
Thursday with no major news or economic catalysts to drive
market direction.
    The Treasury saw lukewarm demand for $28 billion in
seven-year notes on Thursday, the final sale of $88 billion in
coupon-bearing supply this week.
    The notes sold at a yield of 2.370 percent, the highest
yield at a seven-year auction since December 2013. The ratio of
bids to the amount of seven-year Treasuries offered             
was 2.55, the strongest reading since September.             
    The United States saw below average demand for a $26 billion
sale of two-year notes on Tuesday and a $34 billion sale of
five-year notes on Wednesday.                          
    The yield curve between two-year and 10-year notes
               edged higher to 53 basis points, after falling to
50 basis points on Wednesday, the flattest level since Oct.
    Many investors expect the yield curve to flatten further
next year as short-and intermediate-dated debt underperforms on
expectations of further rate increases, and as the Treasury
increases supply to make up for the Federal Reserve’s declining
bond purchases.
    “It still has room to flatten given the Fed expectations,
given growth in the economy, and given where the issuance is
going to come from the Treasury,” said Justin Lederer, an
interest rate strategist at Cantor Fitzgerald in New York.
    The Fed has indicated that an additional three increases are
likely next year, though interest rate futures traders are
pricing in only two.
    The Treasury is expected to initially concentrate supply
increases in Treasury bills and shorter-dated notes.
    Trading volumes have been thin this week with many traders
and investors away after Monday's Christmas holiday and before
next Monday's New Year's Day holiday. The bond market will close
early on Friday at 2 p.m EST (1900 GMT).

 (Editing by Susan Thomas
Editing by Chizu Nomiyama)
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