TREASURIES-Inch up in Asia on safety bid, CPI eyed

* Curve to steepen near-term on flight-to-quality bid

* Market awaits as Bernanke testifies again

* Wariness before CPI prevents active buying in Asia

By Chikako Mogi

TOKYO, July 16 (Reuters) - U.S. Treasuries inched up in Asia on Wednesday as Federal Reserve Chairman Ben Bernanke's comments prompted investors to pare back expectations for a rate hike this year, but wariness before inflation data kept buying limited.

Worries about the health of the U.S. financial sector and the economy spurred flight-to-quality buying particularly in shorter-dated securities, while longer-dated bonds were weighed down by inflation concerns, traders said.

Bernanke, in testimony to Congress, said on Tuesday restoring financial market stability was a top priority for the U.S. central bank. He said financial markets and institutions remain under "considerable stress".

"The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately," he said.

Bernanke stressed that the outlook for economic growth and inflation was unusually uncertain, remarks which investors took to mean the Fed would keep interest rates steady at least until August and probably the end of the year. [ID:nN15461263]

"Bernanke's comments suggested a recovery in U.S. growth will be pushed back well into next year, but because of inflation pressures it's difficult to bet on the probability of a rate cut just yet," said a dealer at a big Japanese bank.

Traders were keeping an eye on Bernanke as he testifies on the state of the economy from 1400 GMT.

They also awaited the U.S. June consumer price index, due at 1230 GMT, with economists expecting a 0.7 percent rise compared with a 0.6 percent increase in May. Excluding volatile food and energy items, CPI is seen rising 0.2 percent, the same as in May.

Jitters over the U.S. financial system will keep investors' appetite solid for the safety of government debt, particularly short-term paper, helping to steepen the yield curve in the near term, the dealer at the Japanese bank said.

But given low market expectations for a rate cut, shorter-dated maturities were less attractive than longer-dated bonds, he said.

"A steady slowdown in growth will ease inflation pressures, so the curve will eventually flatten. Longer-dated bonds are more appealing over the long term," he said.

As Bernanke testified, U.S. short-term interest rate futures cut implied prospects for a rate hike by the year-end to as low as 42 percent after being almost fully priced on Monday, before rising back to around 70 percent on Tuesday afternoon.

September T-note futures TYv1 rose 6/32 to 115-19.5/32.

Benchmark 10-year notes US10YT=RR rose 2/32 in price to yield 3.821 percent, down about 1 basis point from late U.S. trade. Two-year notes US2YT=RR inched up 1/32 to yield 2.349 percent, dropping 4 basis points.

Treasuries have been supported as the U.S. government's rescue plan for the embattled mortgage lending giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) failed to relieve investor fears about the damage to their capital from mortgage defaults. (Editing by Michael Watson)