TREASURIES-Drop in Asia on Hoenig, supply concerns

By Chikako Mogi

TOKYO, May 7 (Reuters) - U.S. Treasury futures fell to a four-month low in Asia on Wednesday after Kansas City Fed President Thomas Hoenig said the Federal Reserve may need to act in a timely way to counter inflation pressures.

Hoenig said late on Tuesday that U.S. economic growth should pick up in the second half of 2008, and given "serious" threats from inflation the Fed will at some point need to raise interest rates. [ID:nN06528406]

June T-note futures TYv1 fell as much as 10/32 to 114-17/32, a four-month low.

Benchmark 10-year notes US10YT=RR fell 3/32 in price to yield 3.934 percent, down 2 basis points from late U.S. trade, after hitting a four-month high of 3.938 percent.

Two-year notes US2YT=RR fell 1/32 in price to yield 2.423 percent, down about four basis points from late U.S. trade.

Traders said selling was also driven by supply concerns before this week's quarterly refunding auctions and due to technical selling as key chart levels have been broken over the past few trading sessions.

"The drop in prices was timed around Hoenig's comments," said a dealer at a foreign securities firm. He added, however, that the remarks were "not something to be overly drawn into" as the Fed has been making similar comments about inflation risks.

"The market moves are more technical, with some support levels being broken and supply due later in the day. There isn't a lot of market momentum," he said.

The Treasury will sell $15 billion in 10-year notes later on Wednesday and reopen a 30-year bond issue to sell another $6 billion on Thursday as part of the government's quarterly refunding.

The dealer said it was legitimate for the curve to steepen further, as the two-year notes yielding around 2.4 percent represented a reasonable value while 10-year notes could get cheaper, with the benchmark yield rising above 4 percent.

On Tuesday, short-dated Treasuries gained on safe-haven bids as Swiss bank UBS's (UBSN.VX) plan to lay off 5,500 employees and sell billions of dollars of subprime mortgages at a steep discount underscored the continuing fallout from the credit crunch on financial markets and the U.S. economy.

But longer-dated Treasuries slipped amid concerns about upcoming issuance and about commodities-fueled inflation as crude oil CLc1 surged to record highs above $122 per barrel.

The Fed trimmed its target interest rate to 2.0 percent at the end of April for a total of 325 basis points of easing since September, and few bond investors expect the Fed to cut rates again in June.