TREASURIES-Prices fall ahead of 30-year bond supply
* U.S. to sell $13 billion 30-year bonds on Thursday * Tepid reception for 10-year Treasury auction * Fed purchases $1.575 billion long-dated Treasuries * Proposed U.S. budget deal seen reducing drag on economy * Most economists see Fed tapering in early 2014-Reuters poll By Ellen Freilich NEW YORK, Dec 11 (Reuters) - U.S. Treasury debt prices fell on Wednesday as the market built in a price concession for the Treasury's $13 billion 30-year bond auction on Thursday, the final leg of the three-part $64 billion sale of government debt this week. The Treasury's sale of 10-year notes on Wednesday drew a somewhat tepid bid which some tied to the proposed two-year federal budget deal announced late Tuesday, which analysts said could bolster the economy and offset the potential for less stimulus from the Federal Reserve next year. "People are setting up for tomorrow. The slightly weaker than average non-dealer takedown for the 10-year auction also played a role because dealers ended up purchasing more paper than expected," said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald & Co in New York. "The market is definitely thinner than normal, as would be expected with year-end rapidly approaching." Lederer also said the Fed remains "the big question" for the market. "I don't think they will taper at next week's policy meeting, but it is certainly in play," he added. The Federal Open Market Committee, the U.S. central bank's policy-setting group, will convene next Tuesday and Wednesday as policymakers will decide whether to scale back the current $85 billion in monthly purchases of Treasuries and mortgage-backed securities, known as QE3. Jennifer Vail, head of fixed-income research for U.S. Bank Wealth Management in Portland, Oregon, said she believes the Fed is "looking at a January taper, not a December taper." "Yes, we see some strength in the labor market and some signs that the housing market has not been destabilized by higher mortgage rates. But we need a couple more prints showing the modest housing recovery is still in place," she said. Year-over-year inflation as measured by the core personal consumption expenditure index remains at 1.1 percent, not in negative territory, which is "reassuring," Vail said. Inflation expectations as measured by the five-year forward breakeven rate have also been stable, she added. Some additional volatility could ensue as the market continues to adjust its expectations about the Fed, Vail noted, adding: "but we expect the 10-year yield to end the year in that 2.85 percent to 2.90 percent range." The bond market's decline was tempered slightly by losses on Wall Street - which often tend to boost demand for bonds - and by the Fed's ongoing bond purchases. The U.S. central bank bought $1.575 billion in Treasuries due in May 2038 to February 2043. On the open market, the U.S. benchmark 10-year Treasury note fell 11/32 in price while its yield rose to 2.85 percent. The 10-year yield had climbed to 2.93 percent last Friday, the highest since Sept. 11, in a reaction to a stronger-than-expected jobs report for November. The 30-year Treasury bond last traded 22/32 lower in price while its yield edged up to 3.88 percent. The 30-year yield touched 3.980 percent last Friday, its highest since August 2011. Investors' reaction to the proposed bipartisan budget agreement in Washington was muted. If Congress does approve the deal, which President Barack Obama supports, it might make it easier for Fed policymakers to begin tapering QE3 early next year, traders and analysts said. Fed officials have cited the budget impasse as a reason to not reduce bond purchases in September when Wall Street had widely expected the FOMC to do so. "While we continue to suggest some degree of caution due to the highly polarized environment in Congress, we believe the budget deal will be passed, removing a key impediment for the Fed to begin tapering QE purchases in January," said Gennadiy Goldberg, rate strategist with TD Securities in New York. In a Reuters poll released on Wednesday, 32 economists expect the Fed to taper QE3 in March, while 22 said it would scale back its bond-buying program in January. Only 12 economists expected a tapering announcement next week.