TREASURIES-Prices rise as data shows lingering economic fragility
* U.S. Q1 GDP more tepid than expected
* Investors could downgrade expectations of Fed bond buying slowdown
* Treasury will sell 5-year notes later in the day
NEW YORK, June 26 (Reuters) - Prices for U.S. Treasuries rose on Wednesday after a recent drop took yields near two-year highs, with weaker-than-expected U.S. growth in the first quarter underscoring the continued potential for fragility in the world's biggest economy. U.S. economic growth was more tepid than previously estimated in the first quarter, held back by moderate consumer spending, weak business investment and declining exports. Gross domestic product expanded at a 1.8 percent annual rate, the Commerce Department said in its final estimate on Wednesday, down from a previously-reported 2.4 percent pace. "The weaker start to the year may have some people downgrading the chances of an early tapering by the Fed, particularly if consumer spending in Q2 looks softer as a result," said Andrew Grantham, an economist with CIBC World Markets Economics in Toronto. "However, with Q1 now well in the rear-view mirror, next week's data from the ISM and non-farm payrolls may still be more important in determining when and by how much the Fed tapers QE," he said.
Some analysts said the data could have a limited effect on the Fed's decision on whether or not to pull back on its asset purchase program. "This won't probably change the discussion at the Fed about reducing bond purchases," said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis, Tennessee. Nonetheless, he said, the market could still draw hope "that the Fed won't be tapering as aggressively." The 10-year note on Wednesday rose 22/32 in price to yield 2.530 percent, from 2.6139 percent on Tuesday. The 30-year bond rose 32/32 in price to yield 3.570 percent, compared to 3.6281 percent late on Tuesday. Global investors dropped everything from stocks to bonds since last Wednesday, when U.S. Federal Reserve Chairman Ben Bernanke suggested the central bank could slow its bond buying program as the economy improves. The prospect of the Fed decreasing or ending its monthly purchases of $85 billion in Treasuries and mortgage-backed securities sent markets into a tailspin, with yields on the benchmark 10-year note reaching their highest since August 2011. The jump in yields, in fact, was a surprise, Minneapolis Fed President Narayana Kocherlakota said on Wednesday. The immediate market reaction was "more outsized than I would have anticipated personally," Kocherlakota, a dovish U.S. central bank official who has a vote on the Fed's policy committee next year, said on CNBC television. The current yields could draw in investors later in the day, when the Treasury will sell $35 billion in five-year notes. The Treasury sold $35 billion in two-year notes on Tuesday at a yield of 0.43 percent, the highest since May 2011, and will sell $29 billion in seven-year notes on Thursday.