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Yields rise on new supply, economic uncertainty

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US 3-MO
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U.S. Treasury yields rose back to the higher end of their recent range on Thursday as traders reported an uptick in investors selling bonds and prepared for new Treasury supply next week.

Treasury yields have held in a relatively tight range in the past two weeks as investors evaluate whether a recent spate of weakening economic data reflects a slowing economy or transitory weakness due to bad weather.

Questions over the strength of the economy and a safety bid from volatility in emerging markets have also pushed yields below where some analysts see their fair value.

The current 10-year yield "is partly due to the emerging market crisis and party due to economic data that has disappointed It's really been the surprise factor in U.S. economic data that's kept rates much lower" than they should be, said Aaron Kohli, an interest rate strategist at BNP Paribas in New York.

BNP sees benchmark 10-year yields as fairly valued at between 3.00 percent and 3.25 percent, a quarter of a percentage point higher than their current levels of 2.76 percent.

Benchmark 10-year notes were 4/32 lower in price to yield 2.75 percent. Thirty-year bonds dropped 7/32 in price to yield 3.72 percent, up from 3.71 percent.

Data earlier on Thursday was mixed with weekly jobless claims edging down and consumer prices inching higher.

A manufacturing survey in the mid-Atlantic region also tumbled to the lowest in a year, while a survey of national factory activity grew in February at its fastest pace in nearly four years. Investors will monitor existing home sales data, set to be released on Friday, but they said they expect consumer confidence figures, due on Tuesday, to have a more significant impact on the market.

Five-year and seven-year notes were the worst performers on Thursday before new supply of the notes next week.

The government said on Thursday it will sell $96 billion in new coupon-bearing supply next week, including $32 billion in two-year notes, $35 billion in five-year notes and $29 billion in seven-year notes.

Five-year notes fell 3/32 in price to yield 1.54 percent, up from 1.51 percent and seven-year notes were also down 3/32 in price to yield 2.19 percent, up from 2.16 percent.

Stocks also gained on Thursday, reducing demand for U.S. government bonds. The Treasury also sold $9 billion in new 30-year Treasury Inflation-Protected Securities (TIPS) on Thursday at a high yield of 1.495 percent, around 2 basis points higher than where the debt had traded before the sale.

The auction saw relatively low demand with a bid-to-offer ratio of 2.34 times, the lowest level since the government reintroduced the maturity in February 2010. There was nonetheless strong demand from indirect bidders, which include mutual funds and some central banks, who took 56 percent of the sale.

The Fed bought $2.66 billion in notes due in 2022 and 2023 on Thursday as part of its ongoing purchase program. It will buy between $1 billion and $1.25 billion in bonds due 2036 and 2044 on Friday.

—By Reuters