TREASURIES-Bonds rise on Greece worries, weak home sales

* Greece's fiscal woes spark safe-haven bid for Treasuries

* More poor data on housing dims recovery outlook

* U.S. to sell $42 billion in 5Y notes after solid 2Y sale

* Anxiety before US President's State of the Union speech (Updates market action before 5Y note auction)

By Richard Leong

NEW YORK, Jan 27 (Reuters) - U.S. Treasuries rose on Wednesday as concerns over Greek debt and a surprise fall in U.S. home sales rekindled global recovery worries and sparked a safe-haven bid for low-risk assets.

The early market gains came in advance of the U.S. Treasury's $42 billion auction of five-year debt and the Federal Reserve's policy statement after a two-day meeting.

"We've been rallying in Treasuries since the session started. Part of the reason was the weakness in Greek bonds. To the extent that we see further weakness in the U.S. economy also, a la the housing market," said Bulent Baygun, head of U.S. interest rate strategy with BNP Paribas in New York.

Greece on Wednesday denied press reports it had chosen Goldman Sachs (GS.N) to sell up to 25 billion euros ($35 billion) of bonds to China, though it reiterated plans for an investor roadshow in Asia.

Greek government bonds were crushed after the denial. Traders had hoped major funding from China could help its budget crisis. Twenty billion euros of Greek sovereign bonds will come due in April and May. For more, see [ID:nLDE60Q0Y4]

Greece's financial problem has put a cloud over the outlook for Europe and its impact on global growth.

"The ultimate fear is always contagion and the global recovery is fragile. So will it go to Portugal or Spain and so on?" said Scott MacDonald, head of research at Aladdin Capital in Stamford, Connecticut.

The price on benchmark 10-year Treasury notes US10YT=RR was up 6/32 at 98-5/32, near their session high. Their yield, which moves inversely to their price, was 3.60 percent, down from 3.62 percent late on Tuesday.

FRAGILE HOUSING FUELS WORRIES

Doubts over the durability of a U.S. recovery has also come into question after this week's batch of surprisingly weak data on housing, which remains a major drag on the economy.

Sales of new homes unexpectedly fell 7.6 percent in December, although November sales were revised to a number stronger than initially reported, according to U.S. Commerce Department data. For more, [ID:nCAT005052]

Uncertainty over the fate of the U.S. Fed's $1.25 trillion program to buy mortgage-backed securities was another concern that has vexed investors this week. See [ID:nLDE60Q15B]

While the Fed has planned to stop its MBS purchase at the end of March, the soft housing data have stoked chatter the Fed may have to extend the timeline and/or to enlarge its MBS program to support the real estate market.

While somewhat unsure where the Fed will tweak its MBS program, investors and economists have been quite certain that it will keep its short-term interest rate target near zero, a level it adopted in December 2008 in an effort to cushion the economy from the global credit crisis.

The Fed is expected to release its first policy statement of 2010 after a two-day meeting at about 2:15 p.m. (1915 GMT).

Another uncertainty spurring some safe-haven demand for bonds was economic proposals in U.S. President Barack Obama's State of the Union address late on Wednesday. If Obama were to announce steps to contain federal spending, that could boost bonds because it would mean less government borrowing. For more, see [ID:nN26225082]

Saddled with political and economic concerns, investors will make space for new five-year notes. Analysts expect decent demand for the second leg of this week's $118 billion bond supply after Tuesday's solid $44 billion two-year sale.

In the "when-issued" market, traders expected the $42 billion in new five-year Treasuries to yield 2.367 percent US5YTWI=TWEB. This compared with a 2.321 percent yield on the actively traded five-year issue US5YT=RR in the open market, according to Reuters data.

(Additional reporting by Burton Frierson and Tom Ryan; Editing by Andrew Hay)