TREASURIES-Bonds rally further on Fed's inflation assurance

* 30-yr yields at 4-month lows; 10-yr yields at 2-wk lows

* Last week's comments by Fed's Warsh support long end

* Curve flattest in 4-5 months

* Major economic data looms later in the week

By Burton Frierson

NEW YORK, Sept 28 (Reuters) - U.S. 30-year Treasury bonds rallied on Monday, pushing yields to four-month lows, as investors remained heartened by last week's assurances that the Federal Reserve will preempt inflation before it takes off.

Fed Governor Kevin Warsh said on Friday the central bank may begin to tighten its super-loose monetary policy before it is clearly necessary, assuaging concerns that high inflation would result from its near-zero percent interest rates. [ID:nN25513396]

Warsh's comments pleased bond investors, particularly as they came after the Fed said in its latest policy statement that it would keep rates low for an extended period while the economy recovers from the worst recession in decades.

Taken together, the message seems to be that the Fed wants to get the economy going but will not tolerate inflation or the boom-and-bust cycles that were prevalent under former Fed Chairman Alan Greenspan, analysts said.

"Maybe the bond vigilantes feel like they are winning. The worst-case scenario of the Fed keeping their foot on the accelerator forever perhaps is not on the table any longer," said David Dietze, chief investment strategist at Point View Financial Services, in Summit, New Jersey.

"They are going to be more disciplined than we saw perhaps in the Greenspan years. Inflation does matter to them...therefore we can be more comfortable with Treasuries, particularly longer dated ones," he said.

The 30-year long bond US30YT=RR was last up 1-2/32 on the day, yielding 4.03 percent versus Friday's 4.09 percent. The yields were the lowest since mid-May.

Long bonds are particularly sensitive to inflation due to uncertainty over holding them for 30 years. Inflation erodes the value of bonds as well as their cash flows.

Benchmark 10-year notes US10YT=RR were up 9/32 yielding 3.29 percent, their lowest in two weeks.

At the short end, two-year notes US2YT=RR were flat in price, yielding 0.98 percent.

GETTING FLAT

The outperformance of longer maturities narrowed the difference in their rates with shorter-dated debt, or flattened the yield curve.

The curve is at its flattest since May, based on the difference between two- and 10-year yields. In a comparison of two- and 30-year yields the curve is its flattest since late April.

Though the effect of Warsh's comments has lingered, analysts say Fed rate rises are not imminent since the economy is still shedding jobs at a rapid pace.

Indeed, investors are already turning their attention to a raft of data this week that will culminate in Friday's jobs report.

The nonfarm payrolls report is the biggest release of the monthly data calendar and is expected to show the rate of job losses slowed in September but the unemployment rate rose to 9.8 percent from 9.7 percent.

Other releases include home prices, consumer confidence, gross domestic produce and factory activity.

"This week we have a deluge of economic data and it's all top-tier economic data," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts.

"The employment picture is really the key data. There is some talk that we could breech 10 percent on the unemployment rate and that is a sort of a psychological level and maybe that is why the 10-year yield is trading near the low 3.30s." (Editing by Leslie Adler)