TREASURIES-Steady in Asia, supported by safety bid

By Chikako Mogi

TOKYO, Dec 18 (Reuters) - U.S. Treasuries were steady in Asia on Tuesday, as investors remained wary of year-end credit shortages and kept their bid for the safety of government securities.

The market was closely watching the result due later this week from the Federal Reserve's debut term auction to see if there was any impact on short-term lending rates.

The Fed on Monday launched its first auction from its Term Auction Facility (TAF) and will release details of the auction of $20 billion of 28-day funds on Wednesday.

If LIBOR rates do not ease, investors might conclude that efforts to ease tightness in interbank lending were not working, giving a further boost to the safe-haven bid for Treasuries, analysts said.

"The liquidity issue has not been resolved and the market is wary of year-end funding, while expectations remain for the Fed to lower interest rates next year, so there isn't much scope for yields to rise," said Yoshio Takahashi, a fixed income strategist at Barclays Capital in Tokyo.

"In the near term, the market will be volatile and keep yields in ranges, but over the medium term, I expect the yield curve to steepen as expectations for lower Fed rates support the shorter end while inflation pressures make the longer end less appealing," he said.

Treasury note futures TYv1 inched up 6.5/32 to 112-16.5/32.

The 10-year note US10YT=RR yielded 4.158 percent, little changed from 4.153 percent late in U.S. trade on Monday.

The two-year note US2YT=RR yielded 3.196 percent, also little changed from 3.200 percent in late U.S. trade.

Treasuries rose on Monday as weak economic data and slumping stocks boosted demand for safe-haven government bonds.

Ten-year yields fell 9 basis points to 4.15 percent on Monday after data showing a plunge in New York state manufacturing activity, another record-low reading on home builder sentiment and a comment by a Federal Reserve Bank economist that the U.S. faced a heightened risk of recession.

Besides weak data, some players saw the funding auctions, of which the Fed has so far planned four in coordination with other major central banks, as providing only a temporary stopgap for tighter lending conditions resulting from huge exposure to subprime-mortgage-linked bonds.

Traders were also keeping an eye on earnings reports due this week by three of Wall Street's biggest investment banks and brokerage firms, starting with Goldman Sachs (GS.N) later in the day, to gauge the impact of the credit crunch on their profits.