TREASURIES-Bonds flat as stimulus bets offsets possible ECB move

* Benchmark yields set for biggest drop in 12 weeks
* ECB mulls bond program with yield targets - Reuters
* Fed's Bernanke speaks of more room to act - letter

By Richard Leong
NEW YORK, Aug 24 (Reuters) - U.S. Treasuries prices were
little changed on Friday as hopes the Federal Reserve will
embark on a new round of bond purchases was offset by a report
on a new bond scheme from the European Central Bank capped the
market rally.
Benchmark yields were still set to post their biggest
decline in 12 weeks. They hit three-month highs this week as
some traders wavered on the view on more Fed stimulus partly in
the wake of evidence of some better-than-expected economic news.
Traders are now waiting to see whether Fed Chairman Ben
Bernanke will signal that the U.S. central bank is moving closer
to implementing a third round of quantitative easing, commonly
referred to as QE3, in his speech at an event in Jackson Hole,
Wyoming next week.
Bernanke has used this event the previous two years to flag
the Fed's intention on more easing.
"The market is leaning toward QE3 heading into next week,"
said John Brady, senior vice president of interest rate futures
sales at R.J. O'Brien and Associates in Chicago.
A letter from Bernanke to a U.S. House panel, obtained by
Reuters, reinforced this view. He wrote, "There is scope for
further action by the Fed to ease financial conditions."

While bets on more Fed easing have rekindled the appetite
for U.S. government debt this week, the rally was curbed by a
Reuters report the European Central Bank is considering setting
yield band targets under a new bond program.
Such a move would help contain borrowing costs for Greece,
Spain and other debt-laden euro zone members and perhaps inspire
confidence among investors that European policy-makers are
making progress to contain the region's festering debt problem.
Benchmark 10-year Treasury notes last traded up
1/32 in price at 99-18/32, paring an earlier gain of 13/32. The
10-year note yield was last 1.67 percent, up from a session low
of 1.63 percent but unchanged from late on Thursday.