US Treasuries end mixed

US Treasuries finished mixed on Tuesday with investors preferring longer-term debt over short-term debt in a relatively quiet day of trading. Traders said investors sold short-dated debt to lend longer-term on the view that long-dated debt would outperform in an environment of rising official interest rates and subdued inflation expectations.
Short-dated Treasuries also suffered in sympathy with euro debt, which were hit by a surprisingly high reading on inflation in the German state of Brandenburg. As a result, two-year notes were flat, with yields steady at 3.03 percent.
In contrast, yields on the benchmark 10-year Treasury note eased to 4.17 percent from 4.19 percent on Monday as prices edged up 5/32.
As a result, the spread between two- and 10-year yields contracted 3 basis points to 114 basis points, a long way from 136 bps at the start of the month and a peak around 274 bps late last year.
"A lot of this trade is noise you get in markets with low liquidity around the holidays; this is not a new trade, it's a little bit more of the same," said John Shin, an economist at Lehman Brothers.
The US Treasury is set to auction around $24 billion in new two-year notes next Wednesday.
"Further flattening in the curve is likely ahead of two-year supply next week," said Richard Gilhooly, fixed-income market strategist at BNP Paribas. "But an unwind could occur at the auction as accounts seek to reduce flattening risk over year end," he added.
In the belly of the curve the five-year note was up 2/32, its yield easing to 3.56 percent from 3.58 percent. At the very long-end, the 30-year bond rose 6/32, its yield easing to 4.80 percent from 4.81 percent.
Tuesday saw a smattering of secondary US economic data due on Tuesday, with most of the week's important releases scheduled for Thursday. The UBS/ICSC survey of chain store sales for the week to December 18 showed some improvement in what had been a slow holiday shopping season. Its sales index rose 1.6 percent in the week, taking annual growth to 3.5 percent from 2.4 percent the week before.
A separate Redbook survey of sales was less promising, showing a 0.7 percent drop in December so far compared to November.
Also out was the Chicago Federal Reserve's national activity index for November. This slowed to 0.12 from 0.49 in October, though any reading above zero suggests economic growth is above its historical trend, the Fed said.