TREASURIES-U.S. bond market rally fades on profit-taking
* Profit-taking, outright selling wipe out earlier gains
* Portugal worries add safe-haven bids for Treasuries
* Jitters about Chinese growth also fuel bond demand
* 10-year yield set for biggest weekly drop in 13 months
NEW YORK, July 12 (Reuters) - U.S. Treasuries prices fell on Friday, as profit-taking halted a rebound in the bond market after remarks by Federal Reserve Chairman Ben Bernanke calmed fears that the central bank might raise interest rates sooner than some had thought. Traders who were still stuck with soured bets in the recent bond market rout also rid of those positions before the weekend, analysts said. "There are still a lot of Treasuries traders who are looking to sell," said Lou Brien, market strategist at DRW Trading in Chicago. Adding to the bond selling was an interview Philadelphia Federal Reserve President Charles Plosser gave to Bloomberg television, where he said he would like to see the U.S. central bank to halt its $85 billion monthly bond purchase program, known as QE3, this year. "I don't want to do it all at once, but I think we should begin to taper very soon and hopefully end it by the end of this year," Plosser said in the interview. Plosser was scheduled to speak on a panel with St. Louis Fed chief James Bullard at an event in Jackson Hole, Wyoming. Prior to their downturn, Treasuries prices rose partly on political and financial troubles in Portugal. A warning about weakening Chinese growth also revived safe-haven bids for less risky U.S. government debt, sending benchmark yields to their lowest level in a week and some 20 basis points below a near two-year peak set on Monday. Moreover, solid demand for this week's $66 billion in coupon-bearing supply helped instill confidence in the bond market in advance of Bernanke's congressional testimony on the economy next week. "It's a follow-through from yesterday's gains. There's also relief with supply out of the way," said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey. Benchmark 10-year Treasury notes last traded 7/32 lower in price with a yield of 2.599 percent, up 2.7 basis points from late on Thursday. Earlier, they were up as much as 15/32 with a yield of 2.518 percent. The 30-year bond last traded 4/32 lower to yield 3.634 percent, up 0.8 basis point from Thursday's close. For the week, the 10-year yield was on track to fall nearly 14 basis points, which would be its steepest weekly decline since June 2012, according to Reuters data. Friday's initial price gains in Treasuries were largely driven by remarks from the Fed chief. Bernanke, at a conference Wednesday sponsored by the National Bureau of Economic Research said a "highly accommodative policy is needed for the foreseeable future." The bond market bounce was also fueled by safe-haven bids due to overseas developments, analysts said. "Bernanke helped to turn sentiment to be less negative. What happened overseas also helped," said Sharon Stark, chief fixed income strategist at D.A. Davidson in St. Petersburg, Florida. Portugal's creditors had been scheduled to begin a review of its bailout on Monday, but the country asked for a delay until August after President Anibal Cavaco Silva rejected a plan to heal a government rift, throwing the euro zone into political disarray. Traders dumped Portuguese government debt with five-year yield jumping to 7.75 percent, its highest level in eight months. They shifted money into Treasuries, German Bunds and other less risky government debt, analysts said. As Portugal's situation was a reminder of the risk from the euro zone debt crisis, a top Chinese official signaled that Beijing might allow economic growth significantly below 7 percent in the second half of the year. Declining Chinese demand has exerted downward pressure on oil and other commodity prices globally. Inflation in the United States has softened this year, complicating the Fed's decision whether to reduce its $85 billion monthly bond purchase program later this year. Some Fed policymakers raised concerns that reducing stimulus too soon might exacerbate the risk of deflation, a downward price spiral that crippled Japan's economy for a decade. The core rate on personal consumption expenditure, the Fed's preferred inflation gauge, was 1.1 percent in May, far below its 2 percent goal. U.S. inflation data released on Friday, however, suggested the worrisome price trend might be turning around with the expected pick-up in business activity and consumer spending in the second half. On Friday, the government said producer prices grew 0.8 percent in June, faster than the 0.5 percent forecast by economists polled by Reuters.
Separately, Thomson Reuters/University of Michigan's preliminary July index of consumer sentiment retreated from a near six-year high due to a decline in confidence about the prospects of the economic recovery.