Bonds dip sharply after report on GSE backstop plan

NEW YORK (Reuters) - U.S. Treasury debt prices fell sharply late on Friday after The Wall Street Journal reported the Treasury was close to finalizing a plan to support government-sponsored home finance companies Fannie Mae and Freddie Mac.

The move in bond prices was likely exacerbated by thin trade volume, as the report came late on Friday afternoon, after U.S. stock markets had closed.

"Any sort of resolution to that situation would remove some of the flight-to-quality bid from the Treasury market," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York. "If it's a Treasury capital injection it could involve issuance of Treasury securities to finance it."

"The knee-jerk reaction is obviously to sell off the Treasury market -- it hit really late on a Friday when things are thin so that can tend to exaggerate the move," Lantz said.

The benchmark 10-year notes traded 21/32 lower in price for a yield of 3.70 percent from 3.63 percent late on Thursday, while 2-year Treasuries traded 8/32 lower for a yield of 2.32 percent from 2.19 percent.

Shares of Fannie and Freddie have plunged since May, and speculation has risen that the government will have to step in to bail out the two companies.

The government has said it may have to intervene and provide funding for the two companies if their financial conditions worsen.

U.S. Treasury debt prices had already fallen on Friday despite a jump in the August unemployment rate, as investors bet yields had recently dropped far enough to reflect the weakening economy.

Benchmark U.S. Treasury prices initially rose in price following news that the U.S. economy shed jobs for the eighth month in a row in August, with the unemployment rate climbing to 6.1 percent, the highest in nearly five years.

But after seeing the lowest yields in more than four months this week, U.S. Treasury prices pared gains and fell early on Friday, as U.S. stocks bounced from a test of the lows seen in July.

"It is your classic buy the rumor, sell the fact," John Spinello, Treasury bond strategist at Jefferies & Co. in New York, said of the bond sell-off on Friday afternoon, before the report on Fannie and Freddie.

(Additional reporting by Burton Frierson; Editing by Leslie Adler)