TREASURIES-Prices gain, break two-day bond selloff
* Prices gain as investors try to find new yield range
* Fed to buy $1.25 bln to $1.75 bln in bonds due 2036-2043
* Treasury to sell $99 bln new coupon-bearing debt next week
NEW YORK, June 21 (Reuters) - U.S. Treasuries prices rose on Friday, breaking a dramatic two-day selloff that sent benchmark 10-year yields to their highest levels in almost two years, as investors evaluated when the Federal Reserve is likely to begin to pare back its bond purchase program. U.S. government bonds have been hurt alongside most assets since Fed Chairman Ben Bernanke said on Wednesday that the economy is on track for further improvement, and that the U.S. central bank is likely to reduce purchases as a result. The Fed has been expanding its balance sheet with trillions of dollars of bond purchases since 2009 to drive down rates, encourage borrowing and help stimulate the economy and the labor market. Investors are now grappling with what effect it will have on markets when the Fed pulls back that stimulus. "It's all one big unwind. That's been a negative for Treasuries as hedges are unwound," said Sean Murphy, a Treasuries trader at Societe Generale in New York. Benchmark 10-year notes were last up 3/32 in price to yield 2.41 percent, down from 2.42 percent on Thursday. The yields are up from around 2.21 percent before the Fed announcement on Wednesday and have increased from around 1.60 percent at the beginning of May. The notes may find technical support at around 2.40 percent in the near term, as there is still a lot of uncertainty over when the Fed will begin to reduce bond purchases, said Murphy. Almost all economists at primary dealers expect that the Fed will start will start pulling back on buying bonds by the end of this year, with many expecting it will begin in September.
Thirty-year bonds rose 15/32 in price to yield 3.49 percent, down from 3.52 percent on Thursday. The yields are up from 3.33 percent before the Fed statement on Wednesday, and from around 2.80 percent at the beginning of May. The Fed will purchase between $1.25 billion and $1.75 billion in bonds due 2036 and 2043 on Friday as part of its ongoing purchase program. Volatility measures have also continued to climb, hitting new 13-month highs on Thursday. The Merrill Lynch MOVE index , which estimates future volatility of long-term bond yields, increased to 96, up from 86.9 on Wednesday. It is up from a multi-year low of around 50 at the beginning of May. Some analysts and investors have expressed concern that the longer the Fed continues its purchases the greater the risk of market disruptions when it pulls out, potentially adding to the already volatile market moves. Meanwhile demand for U.S. bonds may be tested next week when the Treasury will sell $99 billion in new coupon-bearing supply, including $35 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday.