TREASURIES-Bonds steady to higher before supply next week
* Shorter-dated bonds firm ahead of supply, data
* Longer maturities boosted by Fed's latest purchase
* Fed funds futures price in rates hike for 2011
* Despite some signs of stability, market still vulnerable
(Updates market action, adds fresh quotes)
NEW YORK, Nov 19 (Reuters) - U.S. Treasuries were steady to higher on Friday, ending a volatile week, as the market consolidated at higher yields reached ahead of new supply and data scheduled for next week.
Thirty-year bonds, meanwhile, rose as the Federal Reserve purchased long-dated debt as part its $600 billion program, known as QE2. The market also benefited from a bid as hedges relating to municipal bond sales were removed.
"People are buying on dips," said Laura LaRosa, director of fixed income with Glenmede in Philadelphia.
Moreover, a $3.25 billion bond deal from California gave a lift to longer-dated Treasuries on dealers buying to close rate hedges tied to underwriting that deal, traders said.
The Treasury Department will sell a combined $156 billion in bills and notes before the Thanksgiving holiday.
The latest wave of Treasury supply will hit after benchmark yields rose to multi-month highs prior to speculation on QE2 as investors exited long bets on the Fed's latest effort to help the economy.
This dramatic selling, in the wake of the Nov.3 QE2 announcement, has so far overwhelmed purchases made by the Fed totaling $38 billion since the program began.
Two-year notes US2YT=RR were little changed in price to yield 0.51 percent after touching a two-month high on Monday.
Benchmark 10-year Treasuries US10YT=RR gained 7/32, yielding 2.87 percent after hitting their highest yields since early August four days earlier.
The 30-year bond US30YT=RR was the week's most volatile issue. Its yield ended the week at 4.24 percent after reaching a 6-month high at 4.42 percent on Monday.
Some participants have seen the sharp yield backup as an opportunity to jump back into Treasuries, a move which flattened the yield curve ahead of next week's supply.
This play is not without risk. Data including third-quarter gross domestic product figures released on Tuesday and personal consumption data released on Wednesday could add to volatility in the holiday-shortened week.
The U.S. bond market will be closed on Thursday.
"An expected upward revision in GDP next week may outweigh an expected downward revision in personal consumption, which we fear may push yields still higher in the short term," said Brian Yelvington, fixed income analyst at Knight Libertas in Greenwich, Connecticut.
Benchmark 10-year note yields have held below the 2.97 percent area, though analysts think a break above the 3 percent area could spark renewed selling that would send the yields even higher still.
The latest rise in Treasury yields could end up being a protracted one. After the Fed first adopted quantitative easing on March 2009, benchmark yields rose seven straight weeks from an intraday low of 2.47 percent on March 19, 2009 to an intraday peak of nearly 4 percent on June 11, 2009.
QE2 ON INFLATION
Bonds have also sold off in recent days on expectations QE2 will be successful in spurring higher inflation, which the Fed hopes will create faster growth and lower unemployment.
"Despite all the very dovish chatter and defense of the overall QE2 program that came out of Bernanke's speech that was published overnight, the front end remains pretty sold off," Yelvington said, referring to remarks from the Fed Chairman Ben Bernanke delivered at an event in Frankfurt on Friday.
Bernanke, facing a barrage of protests about the asset-buying spree from within and outside the central bank, said a more vigorous U.S. economy was essential to fuel the global recovery and dismissed charges he was debasing the dollar. For details, see [ID:nN18107490]
The Fed has said it wants its program to boost inflation to around 2 percent level, compared with around 0.6 percent now.
Federal funds futures have started to reflect increasing expectations the Fed will be successful. Those futures for December 2011 are now implying roughly a two-thirds chance of a 25 basis points interest rate hike next year, compared with no chance two weeks ago, Yelvington said.
"When you consider the Fed has committed itself to a purchase program that will at least tentatively run until the middle of next year that seems like a fairly aggressive pricing," he added.
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