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TREASURIES-Prices flat to lower as investors await supply, Yellen

Gertrude Chavez-Dreyfuss
Monday, 10 Feb 2014 | 3:20 PM ET

* Yellen testimony in focus, Fed chair seen sticking to script

* Traders looking to auctions this week, demand seen steady

NEW YORK, Feb 10 (Reuters) - U.S. Treasury debt prices were little changed to slightly lower on Monday in thin trading, after a rally the previous session on a weaker-than-expected U.S. non-farm payrolls report, with investors bracing for this week's heavy supply on the long end. Markets are also awaiting the first testimony of Federal Reserve Chair Janet Yellen, who testifies in Congress on Tuesday and Thursday after a second month of weaker-than-expected U.S. jobs data. "There's really not much impetus today. Everybody is waiting for Yellen's testimony tomorrow," said Kim Rupert, fixed-income manager at Action Economics in San Francisco. "It's kind of a position-squaring day from recent price moves." Despite poor U.S. jobs data, Yellen is expected to give a balanced assessment of the world's largest economy which should suggest the reduction in the Fed's asset purchases remains on track. "There were hopes built up on Friday that the Fed will come to the rescue given the state of the recent weak economic data, but the market will more likely be disappointed," said Guy LeBas, chief fixed income strategist, at Janney Montgomery Scott in Philadelphia. Benchmark 10-year Treasuries were last down 2/32 in price to yield 2.68 percent, little changed from Friday, while 30-year bonds slipped 2/32 to yield 3.66 percent, also little changed from the previous session. There was nothing on the U.S. data calendar on Monday except for the large T-bill auctions, including $84 bln in three- and six-month bills, and $50 bln of l72-day cash management bills. The Treasury sold record amounts of three-month and six-month debt at the highest interest rates on the maturities since October. Worries about the U.S. government's inability to increase its $16.7 trillion borrowing limit by late February triggered the record supply. The Treasury said it would pay dealers and investors 0.095 percent on $42 billion of its three-month debt due on May 15. And for the $42 billion six-month T-bills maturing on Aug. 14, the government would pay 0.11 percent. The amount of three-month bills sold surpassed the prior record of $35 billion, while the amount of six-month debt sold eclipsed the previous record of $31 billion.

MORE SUPPLY The Treasury, meanwhile, will sell $70 billion in new coupon-bearing debt this week, including $30 billion in three-year notes, $24 billion in 10-year notes, and $16 billion in 30-year bonds. Analysts said domestic demand has improved on the three-year sector, with strong performances in previous auctions and reversing weak showings in the first half of last year. "The reversal in the weak performance has been driven by an improvement in domestic fund demand," wrote Barclays Capital in a research note. "On a three-month moving average basis, their participation has increased to 25 percent, the highest in a year." On the 10-year note, direct bidder participation has declined and performance has weakened recently, even as demand has remained steady. Thirty-year maturities, on the other hand, have seen a recent decline in demand, particularly from foreign investors, but that is from a high base. "The 10s and 30s (auction) should go okay despite weakening demand overall," said Action Economics' Rupert. Even though the unemployment rate has improved and moved closer to the Federal Reserve's 6.5 percent threshold, inflation remained way off its two percent target, which should still encourage buyers for both maturities. The Treasury also announced on Monday it will borrow just $8 billion this week in bills that must be repaid in one month. That's the same amount of one-month debt taken on last week, which was the lowest level in almost six years. In late trading, five-year notes were down 2/32 in price to yield 1.47 percent, while seven-year notes were 1/32 lower with a yield of 2.12 percent.