TREASURIES-Bonds fall on reduced QE2 bets, 5Y auction

* Mediocre reception to $35 bln 5-year Treasury supply

* Supply comes in anticipation of Fed buying more bonds

* Size and pace of “QE2” purchases by Fed uncertain

* Debate whether Fed will be able to reflate economy

(Updates market action after 5-year auction)

By Ellen Freilich

NEW YORK, Oct 27 (BestGrowthStock) – U.S. government debt prices
fell on Wednesday as traders reduced bullish bets on the
Federal Reserve’s next bout of bond purchases and the five-year
debt sale fetched lukewarm demand.

Doubt about the aggressiveness of the Fed’s next asset
purchases hurt bond prices, but the latest data on new home
sales and business spending supported the view another round of
bold quantitative easing, known as “QE2,” was needed.

The Fed is expected to outline its asset purchase program
after the U.S. central bank’s policy meeting Nov. 2-3.

Some analysts estimated the Fed would buy $2 trillion in
Treasuries in the coming months, but there is no consensus how
aggressively the Fed will accumulate Treasuries.

Robert Tipp, chief investment strategist at Prudential
Fixed Income in Newark, New Jersey, said bond investors had
gotten very optimistic about an aggressive Fed easing program
and then had some second thoughts.

“But at the end of the day, I would guess the sell-off
(would) run out of steam between now and next week,” he said.

Meanwhile, the government sold $35 billion in five-year
notes auction, which is part of this week’s $109 billion in
coupon-bearing supply, at a yield of 1.330 percent. For more,
see [ID:nTAR000408]

Traders had expected the new issue due Oct 2015 to clear at
a yield of 1.324 percent, shortly before the Treasury announced
the auction results.

Benchmark 10-year Treasury notes (US10YT=RR: ) were down
14/32 in price with their yields at 2.70 percent. Earlier, the
10-year yield touched a one-month high of 2.71 percent.

Bond and stock prices reflect the debate over whether the
Fed can pull the economy back from deflation.

When bonds rally and stocks sink, investors are showing a
lack of confidence in an economic resurgence.

The conviction that the economy will recover, or reflate,
and produce employment, would push stocks up and weaken bonds,
pushing Treasury yields higher.

Bill Gross, manager of the world’s largest bond fund at
Pacific Investment Management Co., said a resumption of asset
purchases by the Federal Reserve would likely signify the end
of the “great” 30-year bull market in bonds.

“The Fed’s announcement will likely signify the end of a
great 30-year bull market in bonds and the necessity for bond
managers and, yes, equity managers to adjust to a new
environment,” Gross wrote in his monthly outlook posted on
Newport Beach, California-based Pimco’s website on Wednesday.

The Fed has already spent $1.7 trillion in large-scale
asset purchases to bolster lending and the economy and some
analysts say that, over time, it could buy up to another $2
trillion in assets.
(Additional reporting by Richard Leong and Emily Flitter;
Editing by Andrew Hay)

TREASURIES-Bonds fall on reduced QE2 bets, 5Y auction