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Bonds flat as market absorbs 2-year note auction

Bond prices were mostly flat on Tuesday after the U.S. government's auction of two-year Treasury notes, the first of three debt auctions this week.

The Treasury Department auctioned $32 billion in two-year notes at a high yield of 0.469 percent. The bid-to-cover ratio, an indicator of demand, was 3.20.

U.S. Treasurys investors pulled back earlier on bets that the Treasurys yield curve would continue to flatten.

Two-year and five-year notes have been the worst performers since Federal Reserve Chair Janet Yellen said last Wednesday that the U.S. central bank could raise interest rates six months after its current bond-buying program ends, suggesting a potential rate hike could happen as early as spring of 2015.

The yields fell to 0.44 percent in the secondary market, after jumping from around 0.34 percent before Yellen's remarks last week. "There is a reversal of some of the flattening trade that was taking place. … The belly of the curve got as cheap as it was going to get," said Thomas di Galoma, head of fixed income rates at ED&F MAN Capital Markets in New York.

The Treasury will also sell $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday, in addition to $13 billion in reopened two-year floating rate notes on Wednesday.

Investors were also focused on assessing data this week for signs about the strength of the economy.

"We've moved a lot since Yellen's press conference last Wednesday. The flattener is a crowded trade; you are seeing people taking off some positions for event risk," said Charles Comiskey, head of Treasurys trading at Bank of Nova Scotia in New York.

On Tuesday, the Commerce Department reported that sales of new U.S. single-family homes hit a five-month low in February, but private-sector data showing consumer confidence surged to a six-year high in March suggested the economy was regaining momentum after being held back by severe weather.

Other major economic releases this week include gross domestic product for the fourth quarter, which will be released on Thursday.

yields were higher at 1.71 percent on Tuesday, after increasing to 1.77 percent on Monday, the highest level since Jan. 9.

Benchmark 10-year notes fell 1/32 in price to yield 2.73 percent, and 30-year bonds dropped 12/32 in price to yield 3.58 percent.

One large flattener trade was seen in U.S. bond futures on the Chicago Board of Trade on Tuesday in spite of the general trend. At 3:05 a.m. (0805 GMT), 9,200 contracts of U.S. two-year Treasury futures traded at 109-22/32 while 5,200 contracts of 10-year bond futures traded at 123-17/32.

The Fed bought $1.15 billion in bonds due from 2036 to 2044 on Tuesday as part of its ongoing purchase program.

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