TREASURIES-Bonds fall as stock rally unwinds safety bid

*Bonds fall as stock surge unwinds safety bid for debt

*Fannie, Freddie cut losses, depleting bid for bonds

*Price-cutting before two-, five-year supply cited

*Lehman purchase potential bolsters financial companies

*Bernanke finds commodity price declines encouraging

By Ellen Freilich

NEW YORK, Aug 22 (Reuters) - U.S. Treasury debt prices fell on Friday, pushing benchmark yields to the highest this week as a surging stock market unwound the bid for safe-haven government bonds and traders cut prices ahead of supply.

Stocks advanced as hopes that Lehman Brothers Holdings Inc LEH.N, the fourth-largest U.S. investment bank, might attract a major investor sparked gains in the financial sector.

A $6.59 drop in the price of oil helped shares of manufacturers, airlines and consumer-oriented companies.

The market also rose after investor Warren Buffett said in a CNBC television interview that he has no bets against the dollar and that stocks are more attractive now than a year ago.

Investors' more positive outlook for the economy whetted their appetite for equities and diminished their desire for safer investments like Treasuries.

"What is good for stocks is bad for bonds," said William O'Donnell, head of U.S. interest rate strategy at UBS Securities LLC in Stamford Connecticut.

Talk that the government would eventually bail out mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) lifted those stocks from their lows and pushed Fannie Mae into the plus column by late afternoon, causing the bid for Treasuries to dwindle further.

"The market unwound the flight-to-quality trade that had been based on concerns about the mortgage agencies," said Josh Stiles, senior bond strategist at IDEAglobal in New York.

People also sold Treasuries ahead of supply, Stiles said.

The Treasury will sell two-year notes on Wednesday and five-year notes on Thursday. The Treasury will announce the size of the auctions on Monday.

Federal Reserve Chairman Ben Bernanke said the recent drop in oil prices and a firmer dollar should help curb inflation, supporting the U.S. central bank's low-interest-rate strategy.

Benchmark 10-year Treasuries US10YT=RR traded 11/32 lower in price for a yield of 3.87 percent, up from 3.83 percent late on Thursday. Benchmark yields reached as high as 3.90 percent on Friday, their loftiest in a week.

Two-year Treasury notes US2YT=RR were 6/32 lower in price for a yield of 2.41 percent, up from 2.32 percent.

Five-year Treasury notes US5YT=RR were trading 11/32 lower in price for a yield of 3.14 percent, up from 3.07 percent late on Thursday, while 30-year bonds US30YT=RR were 1/32 lower for a yield of 4.47 percent compared with 4.47 percent the previous day. (Additional reporting by Chris Reese; Editing by Jonathan Oatis)