TREASURIES-Little changed in Asia as selling subsides

By Naomi Tajitsu

TOKYO, Feb 5 (Reuters) - U.S. Treasuries were little changed on Tuesday, taking a breather after sliding the previous day, while investors stayed on the lookout for more signs of economic weakness and financial instability that could boost shorter-dated paper.

Bonds slipped on Monday even as Wall Street stocks fell, as investors booked profits on gains made last week on growing speculation that the U.S. economy may be heading for a recession, which kept the two-year yield close to its lowest in four years.

Dealers said the short end would remain supported as many in the market are pessimistic about the U.S. economy after the Federal Reserve slashed interest rates by a whopping 125 basis points last month while data showed that U.S. firms cut jobs for the first time in more than four years.

U.S. factory growth rebounded unexpectedly in January, somewhat muddling the economic outlook, but many in the market expect growth to continue slowing, which may require the Fed to keep cutting rates from the current 3 percent.

"The front end will continue to move downwards in anticipation of Fed action," said Adam Mackillop, head of U.S. rates trading in Asia at Barclays Capital.

Dealers said they would keep watching developments in the bond insurer sector, the latest casualty of the credit crunch, as firms come under review by credit ratings agencies and face losing their triple-A ratings.

Ten-year Treasury futures TYc1 inched up 2.5/32 to 116-28.5/32.

Ten-year notes <US10YT=RR> rose 2/32 in price to yield 3.635 percent, down a touch from 3.647 percent in late New York trade.