TREASURIES-Flat in Asia, take breather after rally

By Masayuki Kitano

TOKYO, April 10 (Reuters) - U.S. 10-year Treasury notes were steady in Asian trading on Thursday, taking a breather after rallying the previous day as equities fell on a bleak corporate profit outlook.

Ten-year Treasury notes were flat from late U.S. trading on Wednesday with a yield of 3.479 percent US10YT=RR.

Two-year notes were also steady with a yield of 1.770 percent US2YT=RR, almost 50 basis points below the Federal Reserve's target for the overnight federal funds rate of 2.25 percent.

"Treasuries have already rallied pretty far. I think about all you can expect from here on is for two-year yields to maybe drop below 1.7 percent," said Yasutoshi Nagai, chief economist for Daiwa Securities SMBC.

Treasuries have trimmed some of their gains after rallying in March on a flight-to-quality sparked by heightened worries about financial institutions' losses from the credit market turmoil.

But Treasury yields have risen over the past few weeks and two-year yields have pulled up from a five-year low around 1.25 percent struck in mid-March, as credit and equities markets gradually regained some calm after JPMorgan Chase agreed to a takeover of ailing Bear Stearns.

Treasuries rallied on Wednesday as U.S. equities took a hit from a profit warning from United Parcel Service Inc, which is suffering from slowing demand for its package shipping service and high fuel costs.

The gains in Treasuries overnight were curbed at one point by a report that the Fed is considering new measures to resolve liquidity problems in the financial markets should the steps taken so far fail to gain traction. [ID:nN09451835]

Later on Thursday, Treasuries could take cues from any surprises in an auction of $50 billion of securities that is part of a Federal Reserve effort to free up lending between banks. (Editing by Hugh Lawson)