The US yield curve flattened as the Federal Reserve's pledge to keep its interest rates near zero for two years pushed down short-term interest rates, encouraging longer-term investors to buy longer-dated bonds for higher returns.

But investors were careful about building up positions.

"It doesn't look that US inflation is slowing. Also we are hearing mixed comments from Fed officials about the central bank's pledge to keep interest rates near zero for two years," said Hiroki Shimazu, senior economist at SMBC Nikko Securities.

Wednesday's US core producer prices rose at their fastest pace in six months. Separately, last week's retail sales posted the biggest gains in four month in July.

Investors are focused on Fed Chairman Ben Bernanke's speech on Aug. 26 at the Fed conference in Jackson Hole, Wyoming.

Ten-year notes rose 5/32 in price to yield 2.149 percent , down nearly 2 basis points from late US trading on Wednesday.

September 10-year T-note futures rose 3/32 to 130-14/32. Trade was relatively light at 33,603 contracts by late Asian trade.

September S&P stocks futures slipped 0.7 percent to 1,180.60.

Japanese investors, including banks and life insurers, were net sellers of foreign bonds, selling 350.5 billion yen's worth last week, data showed.

Some said they were locking in profits last week after concerns over a US economic slowdown and the Fed's policy sharply pushed up Treasury prices but others said they may be removing foreign bonds from their portfolios to lighten their exposure to possible sovereign debt problems.

Copyright Reuters, 2011