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* Rate-hike expectation drags on Treasury prices
* Treasury debt losses limited by Iraq tensions
* Focus on two-day Fed monetary policy meeting
By Gertrude Chavez-Dreyfuss
NEW YORK, June 13 (Reuters) - U.S. Treasury debt prices drifted lower on Friday in thin trading, pressured by sharp losses in UK bonds after Bank of England Governor Mark Carney said interest rates could rise sooner than expected, as well as expectations of a rate hike from the Federal Reserve sooner than previously expected.
Yields across the board rose after two straight days of declines, with market participants selling the front to the intermediate end of the curve more than long-term government securities.
The underperformance of shorter-term maturities rather than longer-dated issues stemmed from their higher sensitivity to a perceived shift in Fed policy.
"There are some unwinds of curve trades in 10s and 30s, 5s and 30s," said Ian Lyngen, senior government bond trader at CRT Capital in Stamford, Connecticut, reflecting worries about Fed tightening.
Investors are now focused on the Fed's two-day monetary policy meeting next week, where a further reduction in the U.S. central bank's asset purchases is expected. Some have also priced in a more positive view of the economy from the Fed.
But losses in Treasuries prices were limited by escalating tensions in Iraq. U.S. Secretary of State John Kerry said Friday he expects President Barack Obama to decide quickly on what steps the U.S. government will take to combat the rapid advance of the Islamist insurgency in Iraq.
Carney kicked off selling in the U.S. bond market overnight when he signaled an earlier rate increase for the British economy than markets had initially priced in.
British government bond prices dropped as a result. The two-year gilt yield soared to 0.903 percent, its highest in almost three years.
In late trading, benchmark U.S. 10-year notes were down 5/32 in price to yield 2.604 percent, from 2.605 percent late on Thursday.
U.S. 30-year bonds were down 3/32 to yield 3.414 percent , from 3.418 percent late Thursday.
The five- and seven-year tenors sold off as well. U.S. five-year notes fell 6/32 in price to yield 1.694 percent from 1.689 percent the previous session, while seven-year notes declined 6/32 in prices to yield 2.204 percent from 2.202 percent late on Thursday.
U.S. Treasury debt yields pulled back from their highs after weaker-than-expected economic U.S. numbers.
U.S. producer prices unexpectedly fell in May as costs declined broadly, indicating inflation pressures remained benign. The U.S. producer price index for final demand slipped 0.2 percent, down from April's 0.6 percent increase.
U.S. consumer sentiment also weakened in June. The Thomson Reuters/University of Michigan's preliminary June reading on the overall index on consumer sentiment was 81.2, down from 81.9 a month earlier and below the median forecast of 83.0 of economists polled by Reuters. (Editing by James Dalgleish)