TREASURIES-Bonds down as investors turn to agency debt

* Bonds down as investors buy up agency debt

* Investors take profits after recent Treasuries rally

* Trade lackluster as investors wait for Bernanke speech (Adds strategists' quotes, updates prices)

By Chris Reese

NEW YORK, Aug 21 (Reuters) - U.S. Treasury debt prices fell on Thursday as investors turned away from bonds to buy the debt of government-sponsored agencies Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Selling in Treasuries was exacerbated as investors deemed that a recent rally that pushed benchmark bond yields to one-month lows had gone too far.

"Agency debt is doing a bit better ... there is just profit taking in Treasuries," said Josh Stiles, bond strategist with IDEAglobal in New York.

Benchmark 10-year Treasuries US10YT=RR were trading 6/32 lower in price for a yield of 3.83 percent from 3.81 percent late on Wednesday. Early on Thursday, benchmark yields fell to 3.78 percent, marking the lowest since mid-July. Two-year Treasury notes US2YT=RR were 3/32 lower in price for a yield of 2.31 percent from 2.26 percent late Wednesday.

Bonds have recently outperformed agency debt as investors have fretted over the future of mortgage finance giants Fannie Mae and Freddie Mac. Stocks of the two GSEs have collapsed this week, with investors wary that the government may have to bail out the mortgage finance companies, which in turn could exacerbate the housing slump and the credit crisis.

"If we judge it by how the (GSE) debt has performed and how the mortgage-backed securities have performed, the bond market has done very well in terms of the spreads, so you start to take out some of the flight-to-quality premium across the (Treasury) curve," said James Caron, co-head of global rates research at Morgan Stanley in New York.

Bonds were hit by some early weakness after lower-than-expected weekly jobless claims data.

However, while the number of U.S. workers filing new claims for jobless benefits fell for a second week in a row, analysts said that, overall, the data painted a bit of a mixed picture on employment, as the four-week moving average of new jobless claims rose to the highest level since December 2001. For details, see [ID:nN21363905].

Analysts said in general that bond trade was relatively lackluster as traders waited for Federal Reserve Chairman Ben Bernanke to speak on financial stability from Jackson Hole, Wyoming, on Friday morning.

Data on Thursday showed the pace of contraction in U.S. Mid-Atlantic factory activity moderated in August. The Philadelphia Federal Reserve Bank said its business activity index rose to minus 12.7 in August from minus 16.3 in July, which beat Wall Street forecasts for a more modest uptick. [ID:nN21412546]

Five-year Treasury notes US5YT=RR were trading 6/32 lower in price for a yield of 3.06 percent from 3.02 percent late on Wednesday, while 30-year bonds US30YT=RR were 8/32 lower for a yield of 4.46 percent from 4.45 percent. (Additional reporting by John Parry;Editing by Leslie Adler)