Bond Prices fall after EU trade deal, mixed auctions

• EU deal reduces market certainty, positive for bonds
• Markets brace for Treasury's refunding announcement
• Treasury to announce financing estimates for this quarter
• Mixed US two-year and five-year auctions
• US Treasury to borrow $1 trillion in Q3

By Gertrude Chavez-Dreyfuss

NEW YORK, July 28 (Reuters) - U.S. Treasuries slipped on Monday, pushing yields higher, as investors showed more optimism about the global economic outlook after the United States and the European Union struck a trade agreement on Sunday.

Auctions on U.S. two-year and five-year notes were mixed, neutralizing the impact on Treasury yields.

It's an event- and data-packed week starting with the Treasury's refunding announcement on Wednesday. The U.S. Treasury is widely expected to maintain current auction sizes for notes and bonds when it announces financing plans, and will likely keep them steady for some time.

But it has been the EU trade deal that has set the bond market on a risk-on path.

The agreement, announced on Sunday between two economies that account for almost a third of global trade, will see the U.S. impose a 15% import tariff on most EU goods - half the threatened rate but much more than Europeans hoped.

The EU also pledged to make $750 billion in strategic purchases, covering oil, gas, nuclear and chips during Trump's term, including up to $600 billion in U.S. military equipment.

"I think resolving the EU trade dispute and all the data we get this week...should be on the favorable side. That's pushing Treasury yields higher..and we're seeing that today," said Stan Shipley, managing director and fixed income strategist at Evercore ISI in New York.

In afternoon trading, the benchmark 10-year yield was up 2.8 basis points (bps) at 4.414% US10YT=RR, after posting its largest weekly decline in a month on Friday. U.S. 30-year yields rose 3.3 bps to 4.962% US30YT=RR. On Friday, 30-year yields posted their biggest weekly fall in two months.

Following the auction, the two-year yield, which reflects interest rate expectations, edged up to 3.926% US2YT=RR.

The note was priced at 3.920%, lower than the market's forecast at the bid deadline, suggesting that investors did not demand more yield to take down the note. The bid-to-cover ratio, another gauge of demand, was 2.62, higher than that of the auction of the same maturity in June.

The sale of U.S. five-year notes came out weaker than expected however. It priced at 3.983%, higher than the market was expecting, indicating that investors asked for a premium to purchase the note. The bid-to-cover ratio was 2.31, lower than that of the previous auction.

Post-auction, U.S. five-year yields were up 1.4 bps at 3.966% US5YT=RR.

"There has been some repricing of short-term yields a little bit to the high side...from where we ended in June . That's a positive. So I don't think there are not that much concerns from the auctions," said Jim Barnes, director of fixed income, at Bryn Mawr Trust in Berwyn, Pennsylvania.

The Federal Reserve also meets this week in a two-day meeting. It 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.

Also on Monday, the Treasury announced that it plans to borrow $1.007 trillion in the third quarter partly to replenish its cash balance that dwindled during the latest debt ceiling episode. The figure was $453 billion higher than its April estimate primarily due to the lower beginning-of-quarter cash.