TREASURIES-Rise in Asia, await PPI and Empire State data

By Masayuki Kitano

TOKYO, April 15 (Reuters) - U.S. 10-year Treasury notes rose slightly in Asian trading on Tuesday, as investors awaited data on producer price inflation and manufacturing activity in New York for clues on the outlook for monetary policy.

With investors wary that signs of rising inflation could make it harder for the Fed to continue cutting interest rates to stimulate the economy, Treasuries could come under pressure if PPI rises faster than expected in March, analysts said.

"The market may react if there is any such rise, especially after the moves in oil prices yesterday and as data last week showed a rise in import prices," said Hiroki Shimazu, market economist for Mizuho Securities.

Investors may be more sensitive to any signs of inflationary pressures after U.S. crude oil futures settled at a record high on Monday and data released on Friday showed that U.S. import prices rose more than expected in March. [ID:nN14388291] [ID:nN11335609]

U.S. crude oil futures CLc1 continued to climb in Asian trading on Tuesday to hit an all-time high. [OIL]

Any losses in Treasuries, however, could be limited by concerns about U.S. corporate earnings and ongoing worries about U.S. banks' losses from the credit market turmoil, Shimazu said.

The 10-year Treasury note rose 2/32 in price to yield 3.505 percent JP10YTN=JBTC, down about one basis point from late U.S. trading on Monday.

The two-year note was steady with a yield of 1.754 percent US2YT=RR.

The median of economists' forecasts for core PPI, which does not include food or energy costs, is for a 0.2 percent increase last month from a 0.5 percent increase in February.

Investors will also take cues on Tuesday from the New York Fed's "Empire State" general business conditions index for April.

The New York State gauge fell in March to minus 22.23, its lowest since the index was launched in July 2001. Economists on average are looking for a meek recovery in April to -17.5.

Regarding Japanese investors' investment stance in the new business year that started in April, Shimazu said some major Japanese insurers that had previously been active toward foreign bond investment may be becoming less so.

But some Japanese regional institutions seem drawn to the higher nominal yields available abroad despite market volatility, Shimazu said, adding that such investors may have an appetite for bonds in Australia, New Zealand or Nordic countries.

Japan's sixth-largest life insurer, Taiyo Life Insurance, told Reuters in an interview on Monday that it planned to cut its foreign bond holdings in the year to March 2009 to shift money into hedge funds and private equity investment.

Dai-ichi Mutual Life Insurance Co, Japan's second-largest life insurer by assets, told Reuters on Monday that big changes to its portfolio were unlikely in fiscal 2008/09. [ID:nJPINS]

U.S. short-term interest rate futures show that investors expect the Fed to lower interest rates by 25 basis points or 50 basis points from 2.25 percent later in April FEDWATCH. (Editing by Hugh Lawson)