TREASURIES-Inch up in Asia on Fed cut, bond insurers

By Naomi Tajitsu

TOKYO, Jan 31 (Reuters) - Short-dated U.S. Treasuries inched up in Asia, supported after rallying on a decision by the Federal Reserve to cut interest rates for the second time in just over a week, along with the possibility that more cuts may be in store.

Dealers said speculation of ratings downgrades to top U.S. bond insurers was also helping to boost bonds, after a cut to No. 4 FGIC Corp's credit rating stoked concerns that financial institutions who bought their insurance may have to write down billions more in credit-related losses.

The two-year yield inched towards a near four-year low hit last week, steepening the yield curve, as Treasuries were boosted on the view that credit woes were far from over, while the overall U.S. economy continues to suffer.

"The monoline impact is big," said a dealer at a Japanese trust bank, referring to the bond insurers. "The market's waiting to see what's going to happen next."

MBIA Inc (MBI.N), one of the top U.S. bond insurers that has been hurt by credit problems, late on Wednesday said it had received $500 million in funding from Warburg Pincus as part of an earlier deal to sell a $1 billion stake to the private equity firm to shore up capital.

Market participants said Treasuries would keep their stride, with demand to centre on shorter maturities as investors flee to the safety of government debt as global equities slump on the view that credit problems will sting the U.S. economy, which is already on the verge of a recession.

Data on Wednesday showed that U.S. economic growth skidded to a near halt in the fourth quarter, adding to the argument that a recession is looming. A strong reading of U.S. employment released the same day did little to alter that view.

The benchmark 10-year Treasury US10YT=RR edged up 3/22 in price to yield 3.630 percent from 3.648 percent late in New York.

Two-year notes US2YT=RR were 1/22 higher to yield 2.138 percent versus 2.162 percent.

Thursday's move kept the short end of the yield curve supported after the Fed's decision to lower its main interest rate by 50 basis points to 3.0 percent -- hot on the heels of an emergency 75-basis-point cut only last week.

Early gains in short maturities expanded the two-year/10-year spread to 149 basis points, its widest since late 2004, as gains in longer-dated bonds have petered out on concerns that a lower fed funds rate may spur inflation at some point down the line.

A Reuters poll shows that 15 out of 16 U.S. primary dealers expect the Fed to cut rates at its next policy meeting in March, with nine forecasting a 25-basis-point cut, while six see rates heading 50 basis points lower.

Dealers said that the health of the bond insurers and the credit market along with economic data would hold the key to the Fed's next move, with some saying they expected economic conditions to worsen.

The market awaited figures on U.S. incomes and spending, as well as factory activity later in the session, which land before crucial non-farm payrolls and the Institute of Supply Management's monthly survey due on Friday.