TREASURIES-Prices rally after strong US 7-year note auction, ahead of Fed decision

By Gertrude Chavez-Dreyfuss

NEW YORK, July 29 (Reuters) - U.S. Treasuries rose across the board on Tuesday, pushing yields to multi-week lows, following a surprisingly sterling seven-year note auction that quelled concerns about diminishing demand for government debt and a weaker-than-expected report on job openings for June, suggesting pockets of weakness in the labor sector.

Investors were also positioning ahead of Wednesday's Federal Reserve decision and a government announcement of its financing plans for this quarter. While the Fed is broadly expected to keep its benchmark overnight interest rate in the 4.25%-4.50% range when its two-day meeting ends on Wednesday, some market participants believe the central bank could likely signal potential easing in September.

"There will be a robust debate of 'doves' vs. 'hawks' at tomorrow's Fed meeting, but there won't be a 'deal with the devil at the crossroads' to cut rates yet," wrote Thierry Wizman, global FX and rates strategist, at Macquarie in a research note. "Still, the 'doves' have a point about the pockets of weakness in the U.S. economy, and the U.S.'s trade deals undercut (Fed Chair ) Jay Powell's favorite excuse for not easing.

In afternoon trading, the benchmark 10-year yield fell to its lowest since July 3, and was last down nine basis points (bps) to 4.330% US10YT=RR. The yield was on pace for its largest daily drop since June 4. U.S. 30-year yields also dropped to their weakest level in three weeks. They last changed hands down 9.3 bps at 4.871% US30YT=RR.

On the short end of the curve, the two-year yield, which reflects interest rate expectations, slid 4.9 bps to 3.873% US2YT=RR. Earlier in the session, the yield fell to a more than one-week low.

The robust $44 billion seven-year note sale was a major driver for Treasuries, pricing at 4.092% , lower by roughly 2.6 bps than the expected rate at the bid deadline, suggesting the note was snapped up by investors without a premium. The auction saw record demand from domestic investors of 33.7%, an all-time high in end-user demand of 96%, and an unprecedented low uptake from primary dealers of only 4.1%. The latter was a positive sign, suggesting that the auction was so successful and the seven-year note so in-demand that dealers had to take in a record low share of the offering.

Earlier in the session, Treasury yields on the long end of the curve extended their fall after data showed U.S. job openings and hiring decreased in June, with openings falling 275,000 to 7.437 million by the last day of the month, the Labor Department's Bureau of Labor Statistics said in its Job Openings and Labor Turnover Survey, or JOLTS report.

Economists polled by Reuters had forecast 7.50 million unfilled jobs.

Hiring also dropped, down 261,000 at 5.204 million in June, undermined by persistent uncertainty about where tariff levels will eventually settle that has left businesses hesitant to boost hiring.

"As the Fed meets, they should take note of the drop in job openings and the fall in quits. The labor market was solid, but it is softening," said Brian Jacobsen, chief economist, at Annex Wealth Management, in Brookfield, Wisconsin. "There’s no reason the Fed should flirt with recession by digging in its heels on insisting everything is fine."

Another piece of data, on the other hand, showed that consumer confidence rose in July, with the index increasing 2.0 points to 97.2 this month. Economists polled by Reuters had forecast the index would increase to 95.0. The report briefly pushed two-year yields slightly higher.

But the market's focus overall was on two key events this week: the Fed decision and the Treasury's refunding announcement.

"I think there will be more discussions within the committee to lower rates," said David Norris, partner at TwentyFour Asset Management. "There's room for rates to be lower than where they are. There's potential because we're getting more clarity on the impact of tariffs."

As for the Treasury's refunding, the department is widely anticipated to keep current auction sizes for notes and bonds for the next several quarters. Analysts said the Treasury can afford to delay increasing the auction sizes for longer-maturity debt given its focus on the issuance of more Treasury bills where demand has been robust. Treasury recently ramped up issuance of short-dated bills to replenish its cash balance, which has shrunk to about $300 billion.

"There are major questions in the coming quarters about what the mix of financing will be," said Lou Crandall, chief economist, at money market research firm Wrightson ICAP in New York. "But there's really no urgency about addressing that this quarter. This quarter, we're going to get a lot of (Treasury) bills."