TREASURIES-Bonds rise with support from Fed purchase program

*Fed's Treasury purchase program further supports bonds

*Gains limited by uncertainty on appropriate yield levels

*Fed's announcement has dramatically flattened yield curve

By Chris Reese

NEW YORK, March 20 (Reuters) - U.S. Treasury debt prices rose on Friday with more support from the Federal Reserve's plan to buy government debt, which has set benchmark yields on track for their biggest weekly fall this year.

The Fed surprised investors on Wednesday when it announced it will buy up to $300 billion of longer-dated Treasuries over the next six months in an attempt to fuel economic activity. Treasuries prices surged, with the benchmark yield falling nearly 50 basis points.

"The Treasury market is still trying to come to grips with the shock (Fed) statement on Wednesday," said William O'Donnell, strategist at UBS in Stamford, Connecticut.

Benchmark 10-year notes were trading 9/32 higher in price for a yield of 2.58 percent, down from 2.61 percent late on Thursday. Benchmark yields ended last week at 2.90 percent, and are set for the biggest weekly dip since late December.

The two-year note was 1/32 higher for a yield of 0.84 percent from 0.87 percent.

Price gains were limited, however, with some investor uncertainty about where yields should be given the central bank's bond purchase plans.

"We're not terribly surprised to see Treasury 10-year yields hovering as traders take stock of what has really happened this week," O'Donnell said.

The Fed's announcement also spurred a marked flattening of the Treasury curve, with the spread between the yield on two-year notes and 10-year notes narrowing to 174 basis points on Friday from 198 basis points late on Tuesday.

Five-year Treasury notes were trading 4/32 higher in price for a yield of 1.61 percent, down from 1.64 percent late on Thursday, while the 30-year bond was 1/32 higher for a yield of 3.63 percent.

The long bond has not experienced the same price benefits as the 10-year note, as the New York Fed said the Treasury purchases would focus on maturities between two and 10 years.

http://www.reuters.com/article/bondsNews/idUSN2033531620090320