TREASURIES-Bond prices rise after strong demand at $162 billion auctions

(Recasts; adds auction news, analyst quote; updates yields)

By Kate Duguid

NEW YORK, Jan 28 (Reuters) – U.S. Treasury bond prices rose on Monday, sinking yields, after $162 billion of new debt sold to strong demand.

The flood of supply, issued to pay for President Donald Trump’s tax cuts and fiscal policies, was bought up despite the crowded auction schedule and an expected pause in Federal Reserve interest rate hikes. The U.S. government sold $81 billion in short-dated bills, $40 billion of two-year notes and $41 billion of five-year notes on Monday afternoon.

“These are very good results considering how much supply we have to bid on. Further out on the curve may be a bit more challenging. As long as the market believes the Fed has its back, the supply should sell well,” said Mary Ann Hurley, vice president, fixed income trading at D.A. Davidson.

A group of bidders, which includes bond dealers and large fund managers, purchased their largest share of five-year notes since July 2014, U.S. Treasury Department data showed.

Indirect bidders, including fund managers and most foreign central banks, purchased their biggest share of two-year note supply in a year, rebounding from a weak auction a month ago.

An additional $78 billion will be sold on Tuesday.

The latest wave of issuance coincides with signals that Fed Chair Jerome Powell may pause the central bank’s gradual increases in interest rates after U.S. economic data came in softer than expected in December and investors were whipped around by volatile financial markets.

Two-year bond yields, which are used as a proxy for market expectations of interest rate hikes, fell about half a basis point, and were last at 2.59 percent.

“The two-year (auction) went very well. And that tells me that the short end is scaling back expectations for Fed tightening,” said Hurley.

Yields had also fallen earlier in the day in step with U.S. stocks, which dropped as the trade war with China hit corporate earnings from Caterpillar Inc and fourth-quarter guidance from Nvidia Corp.

Later this week, investors will be watching the release of several important economic data reports, some of which had been delayed by the record five-week partial U.S. government shutdown that ended this weekend. Employment data for December will be published on Friday, and is expected to show the shutdown’s impact.

The benchmark 10-year yield was down half a basis point at 2.75 percent. (Reporting by Kate Duguid; editing by Jonathan Oatis)

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