TREASURIES-U.S. bond prices rise on drop in durable goods orders
* Durable goods orders fell 7.3 percent in July, more than forecast
* Orders category seen as business spending proxy fell 3.3 pct
* Treasury to sell $98 billion of 2, 5, 7 year notes
NEW YORK, Aug 26 (Reuters) - U.S. Treasuries prices rose on Monday after the government reported a bigger-than-expected drop in orders for long-lasting manufactured goods in July.
The 10-year Treasury note rose 7/32 in price. Its yield eased to 2.80 percent from 2.82 percent late on Friday.
With debt supply due this week and expectations that the Federal Reserve will soon begin to curb its bond purchases, the market's response to the weaker-than-forecast data was relatively mild.
Craig Dismuke, chief economic strategist with Vining Sparks in Memphis, Tennessee, said the news would not stop the Fed from "tapering," but that the Fed "might taper less than expected."
The Commerce Department said orders for durable goods fell 7.3 percent, more than the 4.0 percent drop economists polled by Reuters had forecast and the sharpest drop in nearly a year.
One category of orders typically viewed as a proxy for business spending, non-defense capital goods orders excluding aircraft, fell 3.3 percent, but after four consecutive months of gains.
RBS Securities traders said they were neutral on Treasuries, preferring to stay sidelined, given a "soup" of conflicting technical signals.
"Daily and weekly momentum studies remain oversold, but 10-year yields are still above a former bull trendline that had been in place for over six years and which comes in at about 2.70 percent this month," said William O'Donnell, head Treasury strategist at RBS Securities in Stamford, Connecticut. "This trendline is now a resistance for 10-year Treasuries."
U.S. Treasuries yields fell from two-year highs on Friday after a 13.4 percent drop in new single-family home sales in July to an annual rate of 394,000 units raised concerns that rising mortgage rates may weigh on the economic recovery.
U.S. government debt yields had climbed to their highest levels since July 2011 as a string of encouraging economic indicators raised hopes that U.S. growth is gaining momentum, making it more likely that the Federal Reserve will begin reducing its bond purchases when it meets in September.
Ten-year Treasury yields had climbed from 1.60 percent at the beginning of May.
Treasury auctions of $98 billion in new two-year, five-year and seven-year debt this week could keep yields from easing further than they have since Friday.
Tending to damp volume, many investors have sold bonds and moved to the sidelines on expectations of increased volatility heading into the Fed's meeting on Sept. 17-18.
Primary dealers surveyed before the Federal Reserve's July policy meeting said they expected the U.S. central bank to trim its asset purchases by $15 billion starting in September.
Shorter and intermediate-dated notes have underperformed since the Fed released minutes of its July meeting on Wednesday.
"For the past few months, we have consistently argued that the belly of the U.S. yield curve was vulnerable to a sell-off," said Amrut Nashikkar, an analyst at Barclays in New York. "We now expect 10-year yields to be at 3.1 percent by the end of this year and continue rising to 3.75 percent by the third quarter of 2014."
Previously, Barclays had forecast 10-year yields to rise to 2.9 percent by mid-2014.
"We are maintaining the view that rates will continue to move higher, but now believe that the drift will be faster than the market expects as we get closer to normalization of monetary policy," Nashikkar said.
Five-year note yields rose as high as 1.70 percent last Thursday, but fell back to 1.63 percent on Friday and 1.60 percent on Monday.
The August jobs data, due on Sept. 6, is the most influential economic indicator due before the Fed's September policy meeting.
The Fed on Monday was buying Treasuries in the February 2036 to August 2043 sector in an amount between $1.25 billion to $1.75 billion.