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TREASURIES-U.S. bonds build on rally as inflation slows

SINGAPORE, May 16 (Reuters) - U.S. Treasuries rallied in Asia trade on Thursday as signs of cooling inflation and a slowing U.S. economy were seen as opening the door to a couple of interest rate cuts this year.

Two-year yields fell three basis points (bps) to touch a six-week low of 4.705%. Ten-year yields, which dropped 9 basis points on Wednesday, fell a further 4 bps to 4.313%, also a six-week low. Yields fall when bond prices rise.

On Wednesday U.S. core inflation slowed to 3.6% in April. That was in line with market expectations but taken by traders as an encouraging signal after a few months of stickiness.

Flat retail sales in April, against expectations for a 0.4% rise, also contributed to the sense of a slowing economy.

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"It's not a recession, but it's a much awaited and much needed slowing in consumption," said Naka Matsuzawa, chief macro strategist at Nomura in Tokyo.

"So that's definitely the prerequisite for any significant slowdown in inflation toward 2%."

Fed funds futures imply 52 bps of cuts priced in this year, up from 45 basis points on Tuesday, with the first 25 bp cut likely in September.

Thirty-year yields fell four bps to a six-week low of 4.475%. Separately, foreign holdings of U.S. Treasuries surged to a record high in March, data from the Treasury Department showed, rising for a sixth straight month. (Reporting by Tom Westbrook Editing by Shri Navaratnam)