TREASURIES-Bonds mixed, short-dated debt dips in safety unwind

(Adds economist comment, updates prices)

By Chris Reese

NEW YORK Aug 24 (Reuters) - U.S. Treasury debt prices were mixed on Friday, as confidence grew that an imminent Federal Reserve interest rate cut may not be necessary to deal with the worst global liquidity and credit squeeze in a decade.

The yield on 3-month T-bills, which earlier this week reached the lowest level in over two and a half years, climbed again on Friday, jumping 27 basis points to over 4.0 percent as the need for a safe haven diminished.

"The perception that credit risk is easing a bit has allowed rates to go higher," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co in Seattle.

Earlier this month investors were convinced that the Fed would have to make an emergency cut in benchmark interest rates before its next policy meeting on Sept. 18 to free up liquidity as financial institutions had increasing difficulty accessing credit lines.

But a reduced flow of news about struggling mortgage companies and a faltering commercial paper market, along with moves by the Fed to inject money into the financial system, has put expectations for an emergency Fed cut on the back burner.

"Certainly people right now are not looking for an inter-meeting cut, but most are still looking for a cut at the Sept. 18 meeting," Hurley said.

While yields rose at the short end of the yield curve, they fell at the longer end as traders took profits on bets that the yield curve would steepen further. The spread on the yield between 2-year notes and 10-year notes has narrowed by over 20 basis points in less than a week.

Benchmark 10-year Treasury notes US10YT=RR traded 9/32 higher in price on Friday for a yield of 4.62 percent from 4.66 percent late on Thursday, while 2-year notes US2YT=RR traded 1/32 lower in price for a yield of 4.30 percent from 4.28 percent.

The curve-flattening trades gave a boost to the 30-year bond US30YT=RR, which traded 29/32 higher in price for a yield of 4.89 percent from 4.95 percent late on Thursday.

Data released early on Friday showing better-than-expected new-home sales and durable goods orders last month were largely shrugged off by investors, as the numbers were not seen shedding much light on the economic impact of the recent credit squeeze.

The day was not entirely without some signs of continued credit problems though, with news that four of Asia's biggest banks were exposed to subprime mortgages to the tune of several billion dollars.

That was not enough to stop the rise in yields on shorter-dated debt like T-bills, which have a maturity of less than one year.

"It's a couple of days of decent stabilization," said George Goncalves, Treasury strategist at Morgan Stanley in New York. "We are slowly seeing signs of improvement in the (asset-backed commercial paper) market. It's time healing all wounds."

Still no one was ready to say the troubles in the short-term lending markets are over.

"The Fed will cut its fed funds target," said Christopher Low, chief economist at FTN Financial in New York, adding "it remains to be seen whether it is in time to prevent a calamity." (Additional reporting by Richard Leong)