* 10-year yield set for biggest weekly drop in 13 months * Worries about Portugal, Chinese growth fed early bid * Perception monetary policy will stay easy supports bonds By Ellen Freilich and Richard Leong NEW YORK, July 12 U.S. Treasuries prices slipped on Friday on profit-taking and pre-weekend position-squaring, following a rebound in the bond market spurred by Federal Reserve Chairman Ben Bernanke's assurance earlier in the week that a highly accommodative monetary policy was needed for the foreseeable future. Traders who were still stuck with soured bets in the recent bond market rout also excused themselves from those positions before the weekend, analysts said. A 20-basis-point drop in the yield on the 10-year Treasury note over the past week "came when a lot of people were too much on one side of the boat," said Jonathan Garber, macroanalyst at Briefing.com in Chicago. "There was a lot of short interest going into this week. People who came late to that trade got shaken out of their positions." Comments by the president of the Philadelphia Federal Reserve, Charles Plosser, also encouraged some selling. Plosser, in an interview on Bloomberg television on Friday, said he would like the U.S. central bank to end its $85 billion monthly bond purchase program this year. "I don't want to do it all at once, but I think we should begin to taper very soon and hopefully end it by the end of this year," Plosser said. Before selling became the dominant trend, Treasuries prices rose as political and financial troubles in Portugal and a warning about weakening Chinese growth heightened investors' appetite for safe-haven U.S. debt. That rise in prices sent benchmark yields to their lowest level in a week, about 20 basis points below a near two-year peak set on Monday. In addition, solid demand for this week's $66 billion in coupon-bearing supply helped instill confidence in the bond market in advance of Bernanke's congressional testimony on the economy next week. But the selling didn't go very far. "We've reversed all the reaction to the original QE3 announcement as well as the decline in yields that occurred after the debt ceiling debate and the S&P downgrade of the U.S. triple-A rating," Garber said, referring to events that rocked the bond market in 2011. "The market has priced in any tapering in bond purchases the Fed could do and if that tapering does not materialize, yields will go lower," he said. Garber cited 2.45 percent on the 10-year yield as a key technical support level. "If that were to give way, a move down to the 2.25 percent area is likely," he said. Benchmark 10-year Treasury notes were unchanged in late trade, yielding 2.59 percent. Earlier, they were up as much as 15/32, with a yield of 2.518 percent. For the week, the 10-year yield was on track to fall 16 basis points, which would be its steepest weekly decline since June 2012, according to Reuters data. Friday's initial price gains in Treasuries were largely a continued reaction to Bernanke's remarks on Wednesday that a "highly accommodative policy is needed for the foreseeable future." The bond market bounce was also fueled by safe-haven bids due to overseas developments, analysts said. Portugal's creditors were set to start reviewing the country's bailout on Monday, but Portugal asked for a delay until August after President Anibal Cavaco Silva rejected a plan to heal a government rift, throwing the euro zone into political disarray. Traders dumped Portuguese government debt, with five-year yield jumping to 7.75 percent, its highest level in eight months. They shifted money into Treasuries, German Bunds and other less risky government debt, analysts said. Also on Friday, a top Chinese official signaled that Beijing might tolerate economic growth significantly below 7 percent in the second half of the year. Inflation in the United States has softened this year, complicating the Fed's decision whether to reduce its $85 billion monthly bond purchase program later this year. U.S. inflation data released on Friday, however, suggested the worrisome price trend might be turning around with the expected pick-up in business activity and consumer spending in the second half. The government said producer prices grew 0.8 percent in June, faster than the 0.5 percent forecast by economists polled by Reuters.
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