TREASURIES-Bonds pleased with auction, fearful of Fed

* Auction of $43 billion in two-year notes goes smoothly

* Some trepidation ahead of Fed policy statement (Updates prices to close)

NEW YORK, Sept 22 - U.S. Treasury debt prices rose on Tuesday as investors cheered a successful auction of $43 billion two-year notes, though looming uncertainty over the tone of Federal Reserve policy kept gains in check.

Despite signs of an incipient economic recovery, investors do not expect the U.S. central bank to lift interest rates any time soon. But some fear this week's policy meeting could yield talk of an eventual exit strategy from emergency liquidity measures, which could create a drag on bonds.

For now, however, dealers seemed perfectly happy to park their money in Treasuries, with a $43 billion two-year note auction finding the strongest investor interest in two years.

"People have to put money to work," said George Goncalves, head of fixed-income strategy at Cantor Fitzgerald. "Every auction right now is like 'Groundhog Day' -- it's stop, pause and repeat. This recurring bid is not going away."

Such interest helped benchmark 10-year Treasury notes firm 10/32 in price, pushing their yield down four basis points to 3.45 percent. The 30-year bond was up 20/32 for a yield of 4.20 percent.

The two-year auction was met with bids for 3.23 times the amount of debt on offer, the highest level since September 2007, and firmly above the 2.6 average seen in the last year. Encouraged by the results, existing two-years were trading 2/32 higher and yielding 0.96 percent.

Indirect bids in the auction, a loose proxy for foreign interest were also robust, coming in at 44.6 percent compared with 40.44 percent average over the preceding 12 months.

Whether such appetite would benefit the rest of this week's $112 billion in total debt auctions remains to be seen.

"The one to watch is the seven-year because it's more duration for the market to take down and it doesn't necessarily have a natural demand base," said Barclays Treasury Strategist Michael Pond. Seven-year notes were reintroduced earlier this year after a long hiatus.

Persistently strong demand for U.S. government bonds will depend greatly on the Fed's future course of action. Part of the market's recent firmness is due in part to widespread conviction that the central bank will leave benchmark borrowing costs at their current zero to 0.25 percent range.

But policymakers have already indicated they are working on honing the tools for an eventual exit. As talk of such ruminations emerges, bonds could be dealt a setback.