TREASURIES-Bond prices rise on lingering subprime woes

NEW YORK, June 27 (Reuters) - U.S. government bond prices rose on Wednesday as persistent worries over the subprime mortgage sector prompted a flight-to-safety bid, but gains were likely to be limited ahead of Thursday's interest rate decision.

Concerns that the housing market turmoil could spread to the rest of the economy have reduced investors' appetite for risky assets in favor of the safe-haven of Treasuries.

These fears have been heightened after Bear Stearns BSC.N was forced to bail out a hedge fund which suffered large losses due to its dealings in subprime mortgages.

"The subprime issue has become a much more focused problem. It has certainly caused some unease in terms of the overall equity market and the overall leverage picture. We have seen some money flow into Treasuries," said Doug Bender, managing director with McQueen, Ball & Associates in Bethlehem, Pennsylvania.

Benchmark 10-year Treasury notes <US10YT=RR> rose 5/32 in price for a yield of 5.06 percent, versus 5.08 percent late on Tuesday. The yield on the two-year note <US2YT=RR>, the most sensitive to changes in the monetary policy outlook, dipped to a one-month low near 4.85 percent.

Analysts said bond prices were unlikely to push higher, with investors cautious ahead of start of the Federal Reserve's two-day policy.

While the Fed is expected to leave its overnight lending rate unchanged at 5.25 percent, the wording of the statement accompanying the decision could shed some clues on the future course of monetary policy.

Investors will also keep an eye on the durable goods data due at 8:30 a.m. (1230 GMT). Analysts polled by Reuters expect a fall of 1 percent from the previous month.

Cantor Fitzgerald trader Howard Marks said durable goods were unlikely to have a big impact on the market.