Bonds slip as rally pauses

NEW YORK (Reuters) - U.S. Treasuries fell on Wednesday, as traders booked profits on recent gains, awaiting for more dismal data that would drive the Federal Reserve to increase its asset purchases to boost a sluggish economy.

The market's modest pullback helped entice bargain-minded investors to scoop up $29 billion of seven-year Treasuries, the last leg of this week's $100 billion in coupon-bearing supply.

Bond losses were minimized by a lingering safety bid tied to worries over Ireland and Portugal due to their banks' losses from bad loans, traders and analysts said.

"The market has rallied a lot here so we are taking a breather. It looks like it's getting tired here," said Larry Milstein, head of government and agency trading with R.W. Pressprich & Co. in New York.

The benchmark 10-year Treasury note's yield has fallen more than 25 basis points in two weeks on growing bets that the Fed could buy up to $1 trillion in Treasuries by year end in an effort to energize private spending and investments, which have been stagnant in the current U.S. recovery.

The market rally had also pushed short-dated and intermediate yields to or near record lows on Tuesday.

While the Fed hinted last week it was open to a second round of quantitative easing, which traders refer as "QE2," the U.S. central bank has not signaled when or how much U.S. government bonds it would buy. There has also been speculation among traders and analysts whether the Fed will make a dramatic gesture or take a gradualist approach.

There appears to be no consensus among Fed policy-makers on QE2. Minneapolis Fed President Narayana Kocherlakota said on Wednesday the impact from the Fed buying more Treasuries will be "muted," while Philadelphia Fed chief Charles Plosser said QE2 is not warranted at this time.

Despite Wednesday's decline, bonds remained in bullish territory, as the 10-year note's yield has held support in the 2.50 percent area. Other technical indicators signal yields should remain at these rock-bottom levels in the near term.

In this ultra low-yield climate, investors have been buying longer-dated debt to reach for more yields.

On Wednesday, the Treasury Department sold the seven-year debt due September 2017 at a record low yield of 1.890 percent, which was below the previous low of 1.989 percent set in August.

The bid-to-cover ratio, which gauges overall demand at a Treasuries auction, came in at 3.04, the highest reading since the seven-year debt maturity was introduced in February 2009.

In the open market, the yield on seven-year Treasuries last traded at 1.87 percent, up from 1.84 percent late on Tuesday. The yield on the benchmark 10-year note rose to 2.50 percent, its current chart support, up from 2.47 percent late on Tuesday.

The yield gap between two-year and 10-year note yield grew to 206 basis points from late Tuesday's 204 basis points, which was its smallest since early September.

(Additional reporting by Emily Flitter; Editing by Jan Paschal)