TREASURIES-U.S. bond prices little changed amid supply
* Solid demand at $32 bln three-year note sale
* U.S. trade gap shrinks to narrowest since October 2009
* Fed bought $5.652 billion in medium-term Treasuries
NEW YORK, Aug 6 (Reuters) - U.S. Treasuries prices ended little changed on Tuesday after the Treasury's $32 billion three-year note sale drew solid demand. A quiet morning yielded to some more active pockets of trading in tight ranges across the curve, said Justin Lederer, Treasury strategist at Cantor Fitzgerald & Co. in New York. Treasuries traded on the heavy side at first as traders cut prices ahead of the Treasury's auction, he said. The price concessions, and higher yields, drew buyers to auction. The strong results were evidenced by a 3.21 ratio of bids received over those accepted. After the auction, the market pared narrow losses, leaving it little changed on the day. The market faces more supply challenges in the next two days as the Treasury executes the second and final parts of its three-part August refunding, selling $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday. Meanwhile, the Federal Reserve is set to buy coupons at the long end of the maturity curve on Wednesday, another of the large-scale purchases it has committed to in order to foster economic growth and lower unemployment. The 10-year notes to be sold on Wednesday carry the highest coupon in such a sale since May 2011, a factor that could draw solid demand similar to what was seen at Tuesday's sale. James Sarni, managing principal at Los Angeles-based Payden & Rygel, said the day's trading offered no dramatic revelations. Stock market losses gave a bit of a bid to safe-haven U.S. debt, but the market is mainly trying to calibrate itself to the degree of likelihood that the Federal Reserve might slowly begin to be a slightly less active buyer of bonds, he said. The U.S. central bank currently buys $85 billion a month in U.S. Treasuries and mortgage-backed securities as part of its quantitative easing program. "The Fed at some point will begin to reduce the amount of accommodation in the system, and what's causing this interim volatility in the market is that people are trying to figure out when - and by how much - that's going to happen," Sarni said. That backdrop tends to create "noise" around economic numbers as investors try to discern how a particular set of economic data plays into the outlook for Fed policy, he said. Sarni sees slow improvement in economic growth and employment, perhaps slower than the current market view. "That will encourage the Fed to take more, rather than less, time in reducing its accommodation," he said. A surprisingly large contraction in the U.S. trade deficit in June inspired some selling early in the session, but that impetus faded as the day wore on. "A lot of participants are concerned about yields heading higher with the possibility of the Fed tapering," said David Coard, head of fixed income sales and trading with Williams Capital Group in New York. Some top Wall Street firms project the Fed will pare its monthly purchases of Treasuries and mortgage-backed securities at its next policy meeting in September. The rest forecast a later move following a disappointing July payrolls report on Friday. Chicago Fed President Charles Evans, a current voter on the Fed's policy-setting group, said on Tuesday the Fed would probably reduce its bond-buying program later this year, and depending on the economic data could do so as early as next month. Evans is typically among the most dovish policymakers. He said the purchases were "likely to wind down over time in a couple or few stages." Still, Evans said the U.S. central bank would keep short-term interest rates near zero until unemployment falls below 6.5 percent, which he expects could happen in mid-2015.
On Tuesday, the central bank bought $5.652 billion in Treasuries maturing May 2018 to April 2019. It was the Fed's largest single QE3 purchase. On the data front, the government said the U.S. trade deficit narrowed in June to $34.22 billion from a revised $44.1 billion in May. The improved trade gap, the smallest since October 2009, helped lift the government's revision on its second-quarter growth view, which was reported earlier at a modest 1.7 percent annualized, analysts said. On the open market, benchmark 10-year Treasury notes were unchanged in price, yielding 2.643 percent. The 10-year yield has traded in about a 30 basis point range after it hit a 23-month high of 2.755 percent in early July.