TREASURIES-Prices climb for third day on accommodative outlook
* Treasury to sell $33 bln 2-year notes at 1 p.m. EDT (1700 GMT
September consumer confidence slightly softer than expected
By Ellen Freilich
NEW YORK, Sept 24 (Reuters) - U.S. Treasuries prices rose on Tuesday for the third straight session, aided by expectations for a longer period of accommodative Federal Reserve monetary policy.
Benchmark 10-year notes rose 14/32 in price, their yields easing to 2.66 percent from 2.71 percent late on Monday. Thirty-year bonds rose 30/32. Their yields eased to 3.68 percent from 3.73 percent late on Monday.
"The market is still digesting the news from the Fed's very significant change in guidance last week extending out to 2016," said Jake Lowery, Treasury trader at ING U.S. Investment Management in Atlanta. "The Federal Reserve has clearly laid out its policy objectives. They will encourage low rates for several years to reduce unemployment. That's very supportive for low yields on Treasuries."
The yield curve flattened with the spread between two- and 30-year yields narrowing to 335 basis points from 339 basis points at Monday's close. The difference between 10- and two-year yields narrowed to 232 basis points from 237 basis points.
"The yield curve is just too wide from a historical perspective and bond investors recognize that," said Tom di Galoma, head of fixed-income rates sales at ED&F Man Capital in New York. "People are putting on curve flattening trades."
Another factor supporting Treasuries "is the stall we've had in housing market data," Lowery said. Progress in housing market data "has slowed recently due to tighter financial conditions, notably the sharp increase in mortgage rates," he said.
"Consistent with that, data on home prices we got this morning showed home price appreciation, but at a slower rate of improvement than we've seen in some prior months," Lowery said.
The S&P/Case Shiller composite index of 20 metropolitan areas rose 0.6 percent on a seasonally adjusted basis in July, less than the 0.8 percent gain predicted by a Reuters poll.
"Home prices still have a long way to go before (they) are back to levels that predated the collapse of the housing market," wrote Thomas Simons, a money market economist at Jefferies, in a note to clients.
The prospect of $97 billion in coupon supply this week, beginning with the $33 billion sale of two-year notes at 1 p.m. EDT (1700 GMT), did nothing to thwart the market's march higher.
"Only weeks ago, the two-year yield was trading north of 50 cents - 0.534 percent before the August non-farm payrolls report. But after the weaker non-farm payrolls and, most notably, the FOMC's decision last Wednesday not to trim its bond purchases, two-year yields have traded back to the mid 30 cents with expectations for zero bound rates remaining well into 2015, if not 2016," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York.
Treasuries prices have risen and yields have fallen since the Federal Reserve decided to put off unwinding any of its monetary accommodation until it had more confidence in the sustainability of the still-subdued economic recovery.
At its policy meeting last week, the Fed decided not to trim its large-scale asset purchases, citing strains in the economy from tight fiscal policy and higher mortgage rates. Fewer asset purchases would put downward pressure on bond prices and upward pressure on yields.
Given the rate outlook, the market should have little trouble digest the two-year Treasury notes, traders said.
"It should be very easy for the market to absorb supply at the front end of the curve given the robust, longer-term guidance on short-term rates to the end of 2016 provided by the Fed last week," Lowery said. "The 2016 horizon covers the maturity dates of even three-year notes so we have great clarity on the path of Fed policy rates for two-year and even three-year Treasury issuance."
The Treasury's weekly sale of four-week bills on Tuesday, however, garnered the most tepid bid since September 4 when the auction was $15 billion, Simons said.
"Last week, the auction generated very strong statistics and stopped at zero for the first time since early May," he noted. "This week, concern about the October 24 maturity date as it related to potential debt ceiling issues, combined with the Fed's ongoing test of the fixed-price, full-allotment reverse repurchase program generated a much more passive bid."
The New York Fed has begun testing an overnight, fixed-rate full-allotment, reverse repurchase agreement facility in a series of daily operations.
As part of its ongoing efforts to foster economic activity and lower unemployment, the New York Fed bought $1.474 billion in Treasury coupons with maturity dates ranging from February 15, 2036 to February 15, 2043.
Conflict over raising the U.S. debt limit tended to support U.S. debt, but Moody's, the debt rating agency, said it expected the U.S. debt limit to be increased.