TREASURIES-Long-term yields dip as Japan's possible bond shift eases supply worries

By Davide Barbuscia

NEW YORK, May 27 (Reuters) - U.S. Treasury yields were lower on Tuesday as concerns over rising global government debt supply, which moved bond yields higher last week, were partly assuaged by expectations that Japan could trim longer-dated debt issuance.

Japan is mulling a cut to super-long bond issuance, sources told Reuters on Tuesday, as policymakers seek to soothe market concerns about worsening government finances. Expectations for a change in long-dated debt supply sent yields on Japanese bonds tumbling and rippled across markets, dragging down both the yen and U.S. Treasury yields.

Further easing pressure on long global bonds, Britain's debt management chief Jessica Pulay told the Financial Times that the UK had pivoted to shorter-term borrowing this year. Meanwhile, euro area bond yields dropped on Tuesday after French inflation data came in weaker than expected.

"This is definitely a step in the right direction," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale, in reference to news from Japan. "A lot of the pressure last week, especially after the 20-year (Treasury) auction, was much more of a global move than anything specific to the U.S.," she said.

The U.S. Treasury Department saw soft demand for a $16 billion sale of 20-year bonds last week, as investors worried about the country's increasing debt burden. Soft demand for the 20-year paper was also seen as reflecting broader concerns over rising global debt levels.

The Treasury Department will sell $69 billion in two-year notes later on Tuesday, followed by $70 billion and $44 billion in five- and seven-year notes on Wednesday and Thursday.

Given the poor auction last week and ongoing worries over demand for U.S. Treasuries, investors will keep a close eye on the auctions, even if demand for the front end of the curve tends to be less impacted by longer-term fiscal concerns.

"We're going to be watching every auction as a risk event ... especially if there's lack of liquidity or buyers don't show up," said Rajappa.

In addition to supply worries, investors were dealing with continued uncertainty over U.S. trade policies after President Donald Trump's latest whiplash on tariffs. On Sunday, Trump rolled back his threat to impose 50% tariffs on imports from the EU next month, restoring a July 9 deadline to allow for talks.

"The reality remains that investors are nervous that the trade war will materially undermine demand for U.S. Treasuries from overseas investors and the question is how significant of an impact that will have on US rates," BMO Capital Markets analysts said in a note on Tuesday.

On the economic front, the picture was mixed on Tuesday.

U.S. consumer confidence improved in May after deteriorating for five straight months amid a truce in the trade war between Washington and China, the Conference Board Consumer Confidence index showed.

Meanwhile, a report from the Commerce Department showed new orders for key U.S.-manufactured capital goods plunged in April. Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, dropped 6.3% last month after a slightly upwardly revised 7.6% rise in March. The drop was lower than anticipated, however.

"Although Durable Goods orders dropped sharply in April, they didn’t drop as much as was expected ... so that shouldn’t derail the market today," Chris Zaccarelli, chief investment officer at Northlight Asset Management said in a note.

Bond markets were closed on Monday for a national holiday.

Benchmark 10-year yields US10YT=RR were last at 4.463%, about five basis points lower than on Friday, while 30-year yields US30YT=RR were about six basis points lower at 4.97%.

Two-year yields US2YT=RR were roughly unchanged at 3.978%.