TREASURIES-Prices up as stock slide spurs safety bid

*Bond pricess up; stock slide feeds safe-haven bid

*Banking sector fears feed safety bid

*Markets await Fed Chairman Bernanke's testimony

*Weaker-than-expected June retail sales lifts bonds

By Ellen Freilich

NEW YORK, July 15 (Reuters) - U.S. Treasury debt prices rose on Tuesday on safe-haven demand as stocks prices tumbled and as a weak banking sector cut expectations that the Federal Reserve will raise interest rates any time soon.

As major stock market indexes fell in early trade, U.S. short-term interest rate futures cut back on implied prospects for Fed rate hikes over the next several months. Prospects for a rate hike by year-end fell to 82 percent after being almost fully priced on Monday.

Traders said Fed Chairman Ben Bernanke's semiannual monetary policy testimony before the Senate Banking Committee at 10 a.m. (1400 GMT) would get a lot of attention.

The bid for safe-haven U.S. government debt was also fed by General Motors Corp's (GM.N) announcement that it would cut employment, sell assets and borrow at least $2 billion to bolster liquidity in the face of plummeting sales. For details see [ID:nN15282763].

In addition, many financial issues again fell sharply when the stock market opened.

Government-sponsored mortgage giants Fannie Mae FNM.N and Freddie Mac FRE.N were down 19 percent and 26 percent, respectively. Citigroup (C.N) and Bank of America (BAC.N) were each down just over 4 percent, but Lehman Brothers Holdings LEH.N and Washington Mutual (WM.N) regained some recent sharp losses.

Economists said June data on inflation and retail sales released on Tuesday offered fresh signs of stagflation in the U.S. economy. U.S. government bonds US10YT=RR generally benefited from these signs of economic weakness, although inflation is a negative for bonds, particularly those that don't mature for many years.

Total sales at U.S. retailers rose a less-than-expected 0.1 percent in June, as auto sales posted their biggest drop in more than two years, a Commerce Department report showed.

"The beginning of the quarter looked better than the end. People have been diverting a lot of their spending power to buying gasoline," said Pierre Ellis, senior economist at Decision Economics in New York.

The Labor Department said producer prices over the last 12 months were up 9.2 percent, the biggest increase since a 10.4 percent gain in June 1981 when the United States was last mired in a low-growth, high-inflation period known as stagflation.

A regional manufacturing survey showed factory activity in New York contracted for the fifth time in six months and data in the report suggested producers were passing on higher prices to consumers, which could add further fuel to inflation.

Benchmark 10-year Treasury notes US10YT=RR traded 9/32 higher in price while their yields, which move inversely to prices, slipped to 3.83 percent from 3.86 percent on Monday.

Two-year notes US2YT=RR rose 5/32 for a yield of 2.39 percent, versus 2.47 percent late on Monday. (Editing by Tom Hals)