TREASURIES-Prices drop after Fed stands pat, auction lukewarm

Chris Reese and Luciana Lopez

* Chinese manufacturing output at 3-month high in October

* Treasury auctions $35 billion of 5-year notes

* Fed stays the course ahead of Nov. 6 U.S. election

NEW YORK, Oct 24 (Reuters) - Prices for U.S. Treasuries slid on Wednesday as the Federal Reserve held its course on monetary policy and appetite for low-risk assets waned following data from China that pointed to strengthening growth. The Fed stuck to its plan to keep stimulating the U.S. economy until the job market improves and repeated its vow to keep rates near zero until mid-2015. ``The economy remains weak, unemployment is unacceptably high, MBS quantitative easing will continue and negative real interest rates on fed funds will enter a fourth year in the middle of December,'' said Joseph Trevisani, chief market strategist with Worldwide Markets in Woodcliff Lake, New Jersey. ``No change for the currency, equities, commodity or credit markets from the Fed,'' he added. Investors had not expected the central bank to change tack in the last meeting before presidential election on Nov. 6. The Fed appears intent on sticking to its bond-buying stimulus, with analysts believing it will wait until at least December to make any changes to its current plans to buy $40 billion of mortgage debt per month. The Fed unveiled a third round of bond purchases last month. ``They just threw so much on us the last time. We are only six weeks away when they first announced QE3 and the extension of the low rate guidance,'' said John Canally, an economist with LPL Financial in Boston. ``They still need time to gauge their impact,'' he said. The Treasury also sold $35 billion of five-year notes on Wednesday at a high yield of 0.774 percent. About 15.5 percent of the sale was awarded to direct bidders, far less than the 38 percent award to direct bidders in Tuesday's sale of two-year notes. On the open market, five-year notes were yielding 0.748 percent. The Treasury will also sell $29 billion of seven-year notes on Thursday. Data showed growth in China's manufacturing sector shrank for a 12th successive month in October. But output was still at a three-month high and order books were at their most robust since April, signaling a strengthening recovery, preliminary results of a purchasing managers survey showed. The uptick in China's HSBC Flash Manufacturing Purchasing Managers Index (PMI), along with rises in new orders and output - its two biggest sub-components - and broad improvement in export orders, inventories and prices charged, all pointed to a turnaround in the world's second-biggest economy.

Benchmark 10-year notes were trading 4/32 lower in price to yield 1.775 percent, up from 1.76 percent late Tuesday but still below the 200-day moving average near 1.81 percent. In Europe, Greece has been granted its long-standing plea for additional time to push through austerity cuts that have been finalized after months of negotiations, the finance minister said on Wednesday. Data showing new U.S. single-family home sales surged in September to their highest level in nearly 2-1/2 years added to the bearish tone in Treasuries. ``It's firmer and consistent with the broader strength in housing reflected in a myriad other reports,'' said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut. Thirty-year Treasury bonds were trading 18/32 lower in price to yield 2.932 percent, up from 2.89 percent late Tuesday.