TREASURIES-Fall in Asia on profit taking after rally on jobs

By Chikako Mogi

TOKYO, April 7 (Reuters) - U.S. Treasuries fell in Asia on Monday as Asian and Japanese investors took profits from sharp gains late last week after weak jobs data underscored worries about a U.S. recession.

U.S. government debt prices rallied on Friday after data showed that U.S. payrolls fell for the third straight month in March, posting the biggest drop in five years and reviving expectations the Federal Reserve would keep making bold cuts in interest rates in a bid to stimulate the economy.

Investors in Asia who could not take profits during the rally after the data was released on Friday were doing so in Asian trading this session, keeping the market top-heavy, said a dealer at a big Japanese bank.

Still, the prospects of further economic weakness, more credit write-downs and Fed rate cuts should be supportive for bonds, he said.

Federal fund futures point to about a 38 percent chance the Fed will cut its target rate on overnight loans between banks by 0.50 percentage points at its meeting later this month.

"The two-year sector is not appealing at current levels, but longer maturities where yields are much higher than the funding costs represent value, and the curve will likely flatten," he said.

June T-note futures TYv1 fell 10.5/32 to 117-31.5/32.

Benchmark 10-year notes US10YT=RR fell 7/32 in price to yield 3.519 percent, up 3 basis points from late U.S. trade on Friday.

The two-year Treasury notes US2YT=RR were down 2.5/32 in price to yield 1.875 percent, up 4 basis points from late U.S. trade on Friday.

As the corporate earnings reporting season for the first quarter begins this week, the dealer said the market was closely watching results from top U.S. financial institutions including Citigroup (C.N) and Merrill Lynch MER.N.

Analysts expect these firms to report losses on further write-downs on their collateralised debt obligations and subprime exposures.

Before the jobs data, sentiment had improved on the view the worst of the credit crisis has passed and the Fed might have done enough with its liquidity steps to forestall a recession, even as European banks reported big investment write-downs, as the market had focused more on their capital boosting steps, analysts said.

On Tuesday, the Fed will release minutes of its March 18 policy meeting, which could offer clues on how far policy-makers are prepared to cut the benchmark rate, analysts said.

The Fed has cut its benchmark interest rate six times since September by a total of 3 percentage points from 5.25 percent. (Editing by Hugh Lawson)