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*Investors eschew Treasuries to buy agency debt

*Traders focus on report that U.S. mulling GSE takeover

*Treasury Secretary Paulson gives no hint of GSE bailout

*Bailout, discount window talk undermines safety bid

Ellen Freilich

NEW YORK, July 11 (Reuters) - U.S. Treasury debt prices fell on Friday as talk of a bailout of the nation's two largest mortgage finance companies raised fears that the supply of safe-haven debt would increase while demand for those assets would decrease.

A report in The New York Times on Friday said Bush administration officials were considering a plan to have the government take over one or both of the companies -- Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) and place them into a conservatorship if their problems worsened.

That report sparked a rally in agency debt, drawing money away from Treasuries. Yields between the benchmark issues of the two kinds of assets narrowed.