TREASURIES-Prices gain as Q1 GDP data disappoints
* 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 fall 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 subdued 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. "That has the market thinking that the Fed will not be tapering perhaps as soon as what the market was thinking just the other day," said Wilmer Stith, co-manager of the Wilmington Broad Market Bond Fund in Baltimore. With markets now more skeptical of a September start date for a Fed pullback from bond purchases, he said, Treasuries could see more volatility. Data will be key, with figures below expectations boosting hopes the Fed will keep its stimulus in place. If economic data prove weak, "the punchbowl stays where it is. Good news, economically, the punchbowl gets moved a little bit further away," he said. Some analysts noted that upcoming data, including key jobs figures, could carry more weight in the Fed's decisions than the first quarter GDP. While those figures could change some people's views, "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," said Andrew Grantham, an economist with CIBC World Markets Economics in Toronto.
The 10-year note on Wednesday rose 18/32 in price to yield 2.545 percent, from 2.614 percent on Tuesday. The 30-year bond rose 25/32 in price to yield 3.582 percent, compared to 3.628 percent late on Tuesday. Global investors have shed 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. As part of its asset purchase program, the Fed on Wednesday bought $3.136 billion of Treasuries maturing August 2020 through February 2023.