TREASURIES-Bonds slip as traders make space for supply

* Market losses capped by concerns over Greece

* Speculation over a Fed discount rate hike lingers

* 2Y-10Y part of U.S. yield curve holds steady

By Richard Leong

NEW YORK, March 19 (Reuters) - U.S. government debt prices slipped on Friday, as investors made room for a supply of $118 billion in longer-dated debt next week.

The market's losses were curbed by ongoing concerns over Greece's fiscal problems after the debt-laden nation said it could seek help from the International Monetary Fund if it gets no aid commitment from its European neighbors. [ID:nLDE62I0YK]

"You are seeing the market setting up for the auctions," said Glen Capelo, co-head of the rates group at Broadpoint Gleacher in New York.

The Treasury Department will sell $44 billion in two-year debt on Tuesday; $42 billion in five-year notes on Wednesday and $32 billion in five-year debt on Thursday. New money from these auctions will help fund an expected $1.5 trillion federal deficit in fiscal 2010.

Analysts anticipate solid bidding for the new debt as demand for Treasuries has remained strong despite worries over the U.S. budget gap and its risks to its triple-A debt rating.

The price on benchmark 10-year Treasury notes US10YT=RR traded down 7/32 in price to yield 3.70 percent, up from 3.64 percent late Thursday, while two-year notes US2YT=RR were down 2/32 to yield 0.9850 percent, up from 0.956 percent late on Thursday.

The spread between yields on 10-year notes and two-year notes held steady at 271 basis points. This gauge of the market's inflation expectations had narrowed to 270 basis points on Thursday, the tightest level so far this year.

In the absence of top-tier data, there was lingering speculation over whether the Federal Reserve will raise interest rates on direct loans it makes to banks to remove excess reserves from the banking system.

The $1 trillion in excess bank reserves has worried some economists that they would cause a resurgence in inflation when the economy gains speed.

On Thursday, chatter of a discount rate hike, which would be the second since Feb. 18, knocked the euro to session lows against the dollar and exerted downward pressure on U.S. short-term interest rates futures. A Fed spokesperson, when asked about this market speculation, said the Fed does not comment on rumors.

The rate hike chatter emerged two days after the Federal Open Market Committee reaffirmed its pledge to stick to a near-zero interest rate policy in a bid to support economic recovery.

The Fed has not raised the discount rate, which stands at 0.75 percent, 50 basis points above the top end of the Fed's range of its policy rate.

"To harp on the discount rate, to make rumours of such a hike yesterday the market centerpiece more than the dovish CPI report is an example of fool's gold," CRT Capital analysts said in a research note on Friday.

(Editing by Chizu Nomiyama)