TREASURIES-Inch lower in Asia after rally

TOKYO, Oct 25 (Reuters) - U.S. Treasuries took a breather in Asia on Thursday, easing slightly after prices rallied overnight on weak housing data and stock losses which reinforced the view that the Federal Reserve will cut interest rates next week.

September sales of existing homes slid 8 percent to an annualised rate of 5.04 million units, the lowest on record dating back to 1999, providing further evidence of a slumping U.S. housing market.

Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) reported a quarterly loss and a huge $7.9 billion write-down on bad leveraged loans and mortgage bets on Wednesday, while disappointing earnings from other companies fanned fears about the economy.

Treasuries were supported by investors flocking to the safety of government debt, and traders expect this trend to continue, pushing yields down further.

"The market is back to flight-to-quality buying, and it's looking bullish technically as well," said a dealer at a U.S. securities firm.

"While yield levels may be overshot, there is still more scope for a curve steepening led by shorter maturities," he said.

As yields fell, some banks unloaded their holdings of Treasuries with low coupons they had bought, waiting to reallocate these funds at an opportune time, the dealer said.

Ten-year Treasury note futures TYv1 were down 3/32 at 110-30/32. The benchmark 10-year Treasury <US10YT=RR> yield was 4.346 percent compared with 4.337 percent in late U.S. trade on Wednesday, hovering near 4.30 percent hit in September, its lowest since early 2006.

The two-year yield <US2YT=RR> was 3.753 percent, compared with 3.737 percent in late U.S. trade on Wednesday, its lowest level since September 2005 and a full percentage point below the Fed's current short-term target rate of 4.75 percent.