Treasurys slip ahead of record auction

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NEW YORK (Reuters) -- U.S. Treasury debt prices eased Friday as investors maneuvered to cut prices ahead of next week's record-large wave of government notes supply.

Shorter-dated Treasurys were also undermined by recent signals the Federal Reserve may be beginning to at least mull how it will dismantle massive amounts of fiscal stimulus and pave the way for higher interest rates.

Losses were limited, however, by weakness in the stock market, which propped up the safe-haven appeal of U.S. government debt.

The Treasury will sell $123 billion in notes next week, a record large weekly issuance, and investors are fretting that massive waves of government debt, intended to rescue financial companies and prop up the economy, could eventually endanger the United States' top-level credit rating.

"The market has tended to go down on the week of supply," said James Caron, co-head of global rates research at Morgan Stanley in New York.

Benchmark 10-year Treasury notes were trading 14/32 lower in price to yield 3.48%, up from a yield of 3.42% late Thursday. Treasury yields move inversely to prices.

Shorter-dated Treasurys, which are more sensitive to interest rate expectations, also took a hit, with the two-year note down 4/32 to yield 1.01% from 0.95% late Thursday.

The shorter end was weighed by an article in the Financial Times Friday saying the Fed was considering changing the language of its policy statement so that it would be less jarring to markets if it had to move quickly to raise rates if price inflation becomes a problem.

The article did not cite any sources, but said the central bank is considering softening the language of its commitment to keep rates near the current ultra-low level for an "extended period."

"What the Fed is doing right now is laying the groundwork to gently break it to everybody that they are not going to be near zero forever ... and that just gets us one step closer to moving to higher interest rates," Caron said.

But even amid the discussion of possible changes in the Fed's policy language and what that would mean for the timing of changes to the benchmark federal funds rate, few expect the U.S. central bank to hike rates any time soon.

"Our forecast remains that the Fed will lift rates toward the end of next year," said Tom Porcelli, U.S. market economist with RBC Capital Markets in new York. "Removal of accommodation will come when the core data, namely employment, improve."

The safe-haven appeal for bonds was undermined Friday by data showing sales of previously owned homes surged to the highest level in over two years in September.

The National Association of Realtors said sales surged 9.4% last month to an annual rate of 5.57 million units, which was well above analysts' expectations of a 5.35 million unit pace.

Thirty-year bonds were trading 15/32 lower in price to yield 4.27%, up from 4.25% late Thursday, while five-year notes were 9/32 lower to yield 2.43% from 2.36%.