TREASURIES-Rise in Asia as investors cut rate rise bets

By Rika Otsuka

TOKYO, June 20 (Reuters) - U.S. Treasuries rose in Asia on Friday as investors reduced bets that the Federal Reserve will soon start raising interest rates to curb inflationary pressures ahead of the central bank's policy meeting next week.

A fall in some stock markets in the region encouraged investors to shift money from equities to government debt, such as Treasuries and Japanese government bonds.

Concerns about the health of the U.S. financial and housing sectors were fanned after Moody's Investors Service stripped the insurance arms of Ambac Financial Group (ABK.N) and MBIA Inc (MBI.N) of their Aaa" ratings on Thursday. [ID:nN19404809]

That sparked some flight-to-quality buying of government debt.

"Investors feel they cannot expect a sharp recovery in the U.S. economy given its weak fundamentals," said a senior trader at a Japanese brokerage

"It's not surprising to see investors buy back Treasuries to square short positions that have been piled up solely based on excessive expectations for aggressive Fed rate tightening," he said.

September T-note futures were up 6/32 at 112-01.5/32 TYv1.

The 10-year note climbed 4/32 in price to yield 4.190 percent US10YT=RR, down around 2 basis points from late New York trading on Thursday.

The two-year Treasury note edged up 1.6/32 in price to yield 2.922 percent US2YT=RR, down nearly 3 basis points.

The short-term yield, the most sensitive to changes in the monetary policy outlook, has fallen 20 basis points from a six-month high of 3.12 percent hit on June 13.

Treasuries had been hard hit on mounting speculation that the Fed may start lifting interest rates steeply as soon as August to rein growth in prices.

But such expectations were trimmed after a series of media reports earlier this week cast doubt on how aggressively the Fed may raise rates this year, and whether the central bank will boost rates in the near term.

The Fed is widely expected to keep interest rates unchanged at 2.0 percent at its June 24-25 meeting.

Tokyo's Nikkei share average .N225 was down 0.9 percent by midday.