TREASURIES-Barely moved in Asia before Bernanke speech

By Naomi Tajitsu

TOKYO, March 4 (Reuters) - U.S. Treasuries were little changed in Asia on Tuesday, as investors awaited a speech by Federal Reserve Chairman Ben Bernanke later in the day for clues into how aggressively the central bank will cut interest rates.

Bonds paused after sliding on Monday, when data showed that a slide in U.S. manufacturing was not as severe as expected. This tarnished some of the appeal of safe-haven debt even as factory activity hit its weakest in nearly five years.

Market participants said this helped to prompt a reversal in a dramatic rally seen in the past month, given that the two-year yield has dropped to its lowest since 2004. Still, many expect investors to continue buying shorter maturities.

"What we've seen is a slight correction in last month's rally," said Yasutoshi Nagai, chief economist for Daiwa Securities SMBC's economic research group, adding that losses have been driven by the longer end of the yield curve.

He added that the curve was bound to steepen more on growing expectations that the Fed may chop interest rates by as much as 75 basis points this month FEDWATCH.

Market participants say that this will continue to support the short end of the curve, while the Fed's insistence that it will keep inflation risks in line is likely to push longer yields higher.

Philadelphia Federal Reserve President Charles Plosser on Monday said that the seriousness of the U.S. financial turmoil warranted lower interest rates, while suggesting that the Fed should be ready to raise rates when needed. [ID:nN03624968]

Treasury futures TYv1 slipped 6.5/32 to 117/32, inching down further after surging to 118-26.5/32 late last week to hit its highest level in more than a month.

Ten-year notes US10YT=RR slipped 2/32 in price to yield 3.562 percent, little changed and staying close to a one-month low of 3.511 percent touched on Monday.

The price of two-year paper US2YT=RR barely moved, keeping its yield around 1.665 percent, not far from a four-year low of 1.568 percent hit on Monday.

This put the two-year/10-year yield spread around 192 basis points, roughly around its widest since mid-2004.

Market participants said that Asian investors have been picking up Treasuries despite a spike in prices, as many had little else to put their money towards other than short-term U.S. paper, given that tumbling stock markets have sharply diminished risk demand.

Bernanke will deliver a speech on reducing mortgage foreclosures later on Tuesday at a convention of the Independent Community Bankers of America.

One analyst said he expected Bernanke to underline his willingness to keep cutting rates to help Americans avoid mortgage foreclosures, which could fuel more buying in Treasuries.