TREASURIES-Rates risk spike if debt sales rise before QE end

* Rates seen likely to rise as Fed ends QE2

* Debt ceiling raise could spark rush of new issuance

* Yields fall on Friday on jobs data, oil rise
(Recasts throughout)

By Karen Brettell

NEW YORK, March 4 (Reuters) – U.S. Treasuries may be
vulnerable to a spike in rates over the coming months if the
government accelerates its debt issuance to take advantage of
Federal Reserve buying, before the central bank ends its bond
purchase program in mid-June.

The Fed has been a major buyer of Treasuries since last
November, when it said it would purchase an additional $600
billion in bonds in an effort to stimulate the sluggish
economy. The program is known as QE2.

Investors including PIMCO’s Bill Gross have expressed
concern over what effect the end of the program will have on
rates, saying they are likely to push higher.

Benchmark 10-year note yields of around 4 percent is a
“rational expectation” if the Fed “disappears as a buyer of
last resort,” Gross , co-chief investment officer, told Reuters
on Thursday. For details, see [ID:nN03181447]

Treasury debt prices rose on Friday after data showed U.S.
payrolls in February were less robust than some bullish
expectations and as high oil prices helped demand for safe
haven debt. Benchmark notes (US10YT=RR: Quote, Profile, Research) rose 20/32 in price to
yield 3.49 percent, down from 3.56 percent on Thursday.

Investors may not wait until June to get nervous,
however.

The U.S. Treasury is expected to hit its $14.3 billion debt
ceiling between April 15 and May 31.

If the ceiling is raised, as most expect it will be, the
government may then rush through new sales to take advantage of
the Fed’s bid for its bonds.

“It will be in its interest to term out and do as much
issuance as it can before QE2 ends,” said Brian Yelvington,
fixed income analyst at Knight Capital Group in Greenwich,
Connecticut.

“I think initially we will get a spike up once they get
permission to sell a lot more and that will spook people,” he
said.

Fed purchases of Treasuries have offset all of this year’s
issuance, helping drive funds into other assets including
stocks and commodities, which have rallied strongly.

High grade corporate bond spreads have also benefited from
“a lack of alternatives,” JPMorgan analyst Eric Beinstein said
on Friday.

Net Treasury issuance available to investors so far this
year has been negative $10 billion, after subtracting the $228
billion in bonds the Fed has purchased, Beinstein said in a
report.

U.S. rates have also been supported by the purchases.

Bond yields were driven down after the Fed completed its
first quantitative easing program last March as the economy
slowed and investors anticipated a new program would be
needed.

Yields then rose back as the new program was launched, in
part because investors liquidated on mass the positions they
had taken before the November announcement, and also because
the stimulus was seen aiding the economic recovery.

Ten-year notes are now trading at roughly the same levels
as they were in May of last year.

With the latest quantitative easing set to expire some fear
the economy may again be vulnerable to a negative turn.

This time, however, rising political pressure against Fed
intervention would make the approval of a new program a harder
sell.

Fed Chairman Ben Bernanke has said decisions about bond
purchases are dependent on economic data, with a strong focus
on employment.

Data on Friday showed that U.S. employers hired at the
fastest pace in nine months in February, and the jobless rate
fell to a nearly two-year low. [ID:nOAT004757]

But some analysts had expected an even stronger report.

The data showed the labor market participation rate was at a
26-year low.

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To see a graphic, click on http://r.reuters.com/cyd48r

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Two-year notes (US2YT=RR: Quote, Profile, Research) rose 5/32 in price on Friday to
yield 0.69 percent, down from 0.76 percent on Thursday and
five-year notes (US5YT=RR: Quote, Profile, Research) rose 17/32 in price to yield 2.18
percent, down from 2.29 percent.

Thirty-year bonds (US30YT=RR: Quote, Profile, Research) rose 16/32 in price to yield
4.59 percent, down from 4.62 percent on Thursday.
(Editing by Andrea Ricci)