The Federal Reserve's $600 billion Treasury buying spree is over and the bond market is growing nervous now that its biggest bidder has stepped aside.

Barring possible hiccups in August as Congress wrestles with the task of raising the legal borrowing limit, the government will go on issuing around $166 billion in Treasury bonds and notes a month, and primary dealers aren't quite sure where demand will come from, and at what price.

One possibility lies in investors such as foreign central banks, insurance companies and fund managers, but pulling them in may be tricky; some Treasury yields are near all-time lows. And for the first time since 2005, JPMorgan is reporting there are no long positions in Treasuries.

Where Europe's sovereign debt troubles once pumped up demand for safe-haven U.S. debt, news that Portugal's debt had been downgraded to junk barely stirred the market this week. Brighter economic data, most recently the ADP National Employment Report, which showed a surprising jump in private- sector employment in June, has further dulled Treasuries' shine at such low yields. Treasuries sold off on Thursday following the ADP number and strong June retail sales.

And Congress is still struggling to raise the debt ceiling, with the latest talks leaving a wide gulf in place between President Barack Obama and Republican lawmakers, as the Treasury's Aug 2 deadline for a potential default draws near.

FAREWELL TO PRICE CERTAINTY

For now, primary dealers, the banks and securities firms authorized to bid on behalf of clients in Treasury auctions, will have to wager on a price without the certainty they had of being able to sell the securities quickly in the secondary market, or to the Federal Reserve.

People are going to be less willing to take on duration without the certainty of three or four buybacks per week to support the market, said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.

Duration is a measure of interest-rate risk.

That has already led to sloppier auctions, with higher borrowing costs for the government as auction high yields fix at a higher mark than available in the open market, a phenomenon known as a tail.

This happened two weeks ago when three separate auctions tailed in the worst week for government debt sales since March 2010.

Auctions tail when bidders insist on cheaper prices for a given security, or when confusion about the demand for that security causes bidders to behave cautiously.

The next test will be next Tuesday when the government sells $32 billion in three-year notes.

Auctions have been unfolding with participants knowing ahead of time that there would be a buyer in the secondary market post-auction, said Scott Sherman, interest-rate strategist at Credit Suisse in New York, one of the 20 primary dealers.

Sherman said that was especially true in three-year notes, five-year notes and seven-year notes.

The Fed was buying the on-the-runs (in those maturities) in volume, usually soon after the auctions and building up a pretty sizable position, he said.

On-the-runs refers to the most recently issued bonds in a given maturity.

There may be a learning curve, where the first auctions come up, the three-year is auctioned and people see what it feels like when there's less demand, and then the next three-year auction comes in August, and you get a bigger change in bidding.

PLAYING THE QE GAME

The Federal Reserve's second round of quantitative easing measures, which began in mid-November and ended June 30, changed the way primary dealers bought and sold Treasuries, presenting a stable -- if temporary -- way to earn profits from spreads.

Primary dealers doggedly tracked the prices of various securities along the yield curve, determining which were relatively expensive and which were cheap, bulking up on the cheap securities, and then selling them to the Fed at a higher price.

Since the Fed kept dealers informed with a pre-announced purchasing schedule in which it listed groups of securities it intended to choose from each day, dealers had plenty of time to plan.

The fast money (investors such as hedge funds) wanted to play the rich/cheap game as well and play some of the volatility, but that's partly going to go away, said Christian Cooper, head of dollar derivatives trading at Jefferies & Co. in New York.

The Fed's first round of quantitative easing, which ended in March last year, amounted to less than half the size of QE2, and traders did not engage in such rigorous efforts to predict Fed purchases the first time around.

During QE2, the Fed bought between roughly $2 billion and $9 billion in Treasuries each day it entered the market. In some weeks, it carried out a purchase operation every day. In others, it bought Treasuries on three or four days out of the week.

The Fed plans to reinvest the proceeds of maturing securities in its portfolio, but with no new purchases, the buying schedule is slowing to a trickle.

The Fed bought just $2.91 billion on Wednesday. Only one more purchase operation is set for this two-week period; the Fed will announce another purchasing schedule on July 13.

We do think there's enough risk appetite and enough fixed-income money around, both foreign and domestic, that at slightly more attractive yield levels would be willing to put some cash to work. said Adam Brown, co-head of Treasury trading at Barclays Capital in New York.

(Editing by Jan Paschal)

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