TREASURIES-Steady in Asia after sell-off

By Masayuki Kitano

TOKYO, July 17 (Reuters) - U.S. benchmark 10-year Treasury notes held steady on Thursday, taking a breather after sliding the previous day when a surge in equities triggered selling of safe-haven government debt.

U.S. stocks rallied more than 2 percent on Wednesday, powered by the best day for bank stocks in 16 years as unexpectedly strong results from Wells Fargo & Co relieved worry about the credit crisis spiralling out of control. [.N]

The jump in equities, together with data showing that U.S. inflation accelerated in June to 5.0 percent year-over-year for the biggest year-on-year rise since 1991, triggered a slide in Treasuries on Wednesday. [ID:nN16428685]

Investors were waiting to see how a proposal to prop up Fannie Mae and Freddie Mac will turn out, and how the outlook for monetary policy will develop, said a trader for a European investment bank.

"The issue over government-sponsored enterprises has not been fully resolved yet," he said.

"In addition, market players are having a hard time figuring out what Bernanke's real intentions are," the trader said.

Federal Reserve Chairman Ben Bernanke told a House of Representatives panel on Wednesday the U.S. economy is going through a "rough time". Bernanke also said that inflation was currently too high. [ID:nN16393562]

The 10-year Treasury note was steady in price to yield 3.936 percent US10YT=RR, steady from late U.S. trading on Wednesday.

The two-year note was steady in price to yield around 2.430 percent US2YT=RR, little changed from late New York trade.

U.S. short-term interest rate futures fell on Wednesday due to the rebound in equities, causing the implied year-end level for the federal funds rate to rise to around 2.2 percent.

That implies that there is a roughly 80 percent chance that the Fed will raise interest rates to 2.25 percent from the current 2.0 percent by the end of the year. That was up from a roughly 70 percent chance seen on Tuesday.

One focal point will be how the rescue plan for Freddie Mac and Fannie Mae might be implemented and what impact that may have on their shares and financial-sector equities in general, said the trader for a European investment bank.

Congressional Democrats and the Bush administration scrambled on Wednesday to shore up support for a major housing market rescue bill, as Republican backing for it faltered on doubts about attaching a plan to bolster Fannie Mae and Freddie Mac. Click on [ID:nN16288379]

(Editing by Sophie Hardach)