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* Yields near record lows on hopes for central bank action
* Bonds pare price losses after US housing data disappoints
* Treasury yield gap over German bunds falls
By Karen Brettell
NEW YORK, July 25 (Reuters) - U.S. Treasuries yields traded near record lows on Wednesday as weak housing data added to expectations central banks will act to stem slowing growth.
Increasingly disappointing economic data globally has raised bets on central bank action. That has boosted bonds and riskier assets including stocks in recent days.
In the United States, investors are watching for signs of further stimulus from the Federal Reserve. Fed officials have already started to think about new tools they can use beyond a possible third round of quantitative easing to spur growth.
"The market is caught between sinking global growth and increased probability of further central bank action," said Guy Haselmann, head of U.S. interest rate strategy at Bank of Nova Scotia in New York.
U.S. Treasuries curbed most of their earlier price losses on Wednesday after data showed that new U.S. home sales in June fell by the most in more than a year, suggesting a setback for the budding housing market recovery.
A relative lack of safe haven assets and the ongoing problems in Europe is expected to keep solid demand for Treasuries, even as yields hit record lows.
"There's a general absence of risk free assets in the world and there is huge demand for risk free assets in uncertain times, so we continue to see regular demand for Treasuries," said Robert Bayston, a portfolio manager at Standish Mellon in Boston.
That said, the low returns and the risk, even if unlikely, that yields could back up again quickly is keeping some investors on the sidelines.
"We're not inclined to add a lot of Treasury exposure at these levels," Bayston said. "We think Treasury valuations are stretched, but clearly they can maintain that for quite some time."
Demand for safe-haven bonds ebbed earlier on Wednesday after a European Central Bank policymaker said there were reasons to boost the firepower of the euro zone's new bailout fund to tackle the region's deepening debt crisis.
Governing Council member Ewald Nowotny said there were arguments for giving Europe's permanent rescue fund a banking license, which would allow it to borrow unlimited ECB money, an idea that the central bank has rejected so far.
Treasuries also were hurt by weakness in German bunds, which have been worsening since Moody's Investors Service on Monday changed its outlook for Germany, the Netherlands and Luxembourg to negative, from stable.
The rating action added to concerns that the countries will face higher costs from bailing out struggling countries in the euro zone.
U.S. bonds typically fall in concert with German government debt, though in recent weeks Treasuries have benefited from an outflow from even the safest euro zone countries.
"U.S. Treasuries are gaining from the flight out of some of the other safe havens," said Haselmann.
The additional yield offered by 10-year Treasuries over 10-year German bunds has fallen to 14 basis points, from 30 basis points last Friday, before the Moody's action.
Haselmann expects Treasuries yields should continue to fall relative to German debt and drop below German bond yields.
"Given the liquidity premium, I would think we should trade through bunds," he said.
Meanwhile the Treasury is expected to see solid demand for a $35 billion sale of new 5-year notes, the second sale of $99 billion in supply this week.
U.S. Treasuries hit new record low yields on Tuesday after the Treasury sold $35 billion in two-year notes at a record low yield of 0.22 percent. The debt sold at a bid/cover ratio of 4 times, the second highest demand on record.
The Treasury will sell an additional $29 billion in seven-year notes on Thursday. (Editing by Andrew Hay)