TREASURIES-Bonds fall on scarce buying before Fed meeting

* Weaker stocks due to jitters over China curb bond losses

* U.S. factory data hints at slower growth

* Home builder sentiment index on tap (Recasts lead, updates market action, adds quote)

By Richard Leong

NEW YORK, March 15 (Reuters) - U.S. Treasury prices slipped on Monday, as investors moved to the sidelines a day ahead of a Federal Reserve one-day policy meeting, uncertain what the U.S. central bank may signal about its exit strategy.

Investors widely expect the U.S. central bank to stick to the near zero percent interest policy it adopted in December 2008 to support the economic recovery. But they are less sure of the Fed's tools and timetable for withdrawing the hundreds of billions of dollars pumped into the financial system in an effort to combat the recession and the global credit crisis.

In New York trading, Treasuries gave up earlier overseas gains from safe haven bids as stock markets slipped on concerns that China could tighten its credit policy, curbing the global recovery.

Bonds also turned lower as dealers unwound their shares of the $74 billion in government debt they bought at last week's auctions. Some investors reentered into steepening trades that involved selling longer-dated Treasuries, analysts said.

"People are on the sidelines and are waiting for what the Fed has to say in its statement," said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.

U.S. federal funds futures implied traders expect little chance the Fed will raise rates until the third quarter.

With this benign Fed outlook supporting prices of shorter-dated Treasuries, some traders decided to reduce their positions in longer-dated debt, analysts said.

The price on benchmark 10-year Treasury notes US10YT=RR was down 6/32 at 99-6/32. Their yield, which moves inversely to price, was 3.73 percent, up from 3.70 percent late on Friday.

The 30-year bond US30YT=RR was down 12/32 in price for a yield of 4.65 percent, up from 4.63 percent late Friday.

U.S. stock markets were lower, with major indexes down as much as 0.7 percent. For more, see [.N]

MANUFACTURING HITS SPEED BUMP

Economic data on Monday signaled some slowing in the U.S. manufacturing sector, which had been a bright spot in an otherwise unremarkable recovery.

The New York Federal Reserve said its index on factory activity in New York state declined to a reading of 22.86 in March from 24.91 in February. The decline, however, was less than expected. See [ID:nNYS007845]

U.S. industrial output edged up 0.1 percent in February, in line with estimates, compared with a 0.9 percent increase in January, the Federal Reserve Board reported. For more, see [ID:nNYS007841]

Until the U.S. economy exhibits consistent strength, the Fed will have little choice but to leave benchmark rates at rock-bottom levels, analysts said.

Still some analysts anticipate that policy makers could signal on Tuesday after the Fed meeting a readiness to remove the billions in cash the Fed pumped into the financial system during the global credit crisis.

The Fed's extraordinary policy measures and the Treasury Department's massive borrowing have fanned concerns over the United States' credit-worthiness and investor appetite for Treasuries.

Rating agency Moody's Investors Service said the United State's AAA rating is safe for now, but risks to the coveted rating, which afford the United States to borrow at the lowest rates in the financial markets, have risen due to its burgeoning debt load. For more, see [ID:nLDE62E0FX]

Treasury data published on Monday showed foreign investors bought $61.4 billion in Treasuries in January, down from $69.9 billion in December. Official investors, mainly foreign central banks, sold a net $4.2 billion in U.S. government securities. For more, see [ID:nN15160281]

The National Association of Home Builders will release at 1 p.m. (1700 GMT) its gauge on home builder sentiment, which is predicted to come in 17 in March, unchanged from February. (Editing by Leslie Adler)