* Debt ceiling seen as complicating ability to raise funds
* US five-year, 30-year yield curve flattest since 2007
NEW YORK, Nov 1 (Reuters) - U.S. Treasury yields fell on Wednesday after the Treasury Department said it would keep auction sizes steady in the coming months, despite the Federal Reserves plan to reduce its bond holdings, but will announce changes in February. "The magnitude and allocation of increases in auction sizes will depend in part on projections for the fiscal outlook," Monique Rollins, Treasury's acting assistant secretary for financial markets, said in a statement. Rollins said the Treasury anticipated "gradual adjustments" to its nominal coupon and 2-year floating rate note issues.
The Treasury will need to increase auction sizes due to the Feds declining participation in the market and as the U.S. deficit widens. The suspension of the countrys debt limit is due to expire on Dec. 8, however, which is seen as complicating the governments ability to raise funds. There is so much uncertainty around December 8 and whether they will get a debt ceiling hike," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York. "To me this is kind of an admission that they dont see an easy one and that they dont know what time theyre going to eventually hit the drop dead date, Kohli said.
Benchmark 10-year note yields fell to 2.38
percent, from 2.40 percent before the announcement. The yield curve between five-year notes and 30-year bonds flattened to 83 basis points, the lowest level since late 2007.
Bond yields have dropped since Bloomberg on
Monday quoted Treasury Secretary Steven Mnuchin saying the government does not see a lot of demand for ultra-long bonds, reducing expectations the government will introduce a new ultra-long maturity. The Treasury Borrowing Advisory Committee (TBAC), which advises the government on its funding strategy, said on Wednesday that the two-year, three-year and five-year part of the yield curve would be an attractive area to increase issuance. Yields increased earlier on Tuesday after the ADP National Employment Report showed that private employers hired 235,000 workers in October, the most in seven months. Investors are next focused on the governments jobs report for October due on Friday. The Fed is expected to keep interest rates unchanged when it concludes its two-day policy meeting on Wednesday. Republicans in the U.S. House of Representatives are due to release long-awaited tax legislation on Thursday, after delaying its introduction by one day. U.S. President Donald Trump is expected to announce his choice for new Fed chair on Thursday, with news reports indicating that Federal Reserve Governor Jerome Powell is likely to get the nomination.
(Editing by Bernadette Baum)