* Ten-year yield hits 3-month low, investors rush to cover shorts

* Ten-year yield down nearly 13bps this week, steepest fall in 1yr

* 2s/10s spread hits narrowest since Feb

SINGAPORE, June 11 (Reuters) – The U.S. yield curve flattened and benchmark 10-year Treasuries were headed for their best week in a year on Friday as the market deemed a spike in inflation to be transitory, squeezing bears out of a host of short positions.

The 10-year yield, which falls when prices rise, dropped about 2.6 basis points to 1.4335% in Asia, its lowest since early March. The yield has fallen nearly 13 basis points for the week so far, the steepest weekly drop since last June.

Traders said short-covering was driving the bond rally, in a market which remains the recipient of enormous Federal Reserve support, after U.S. inflation data on Thursday was dismissed as insufficiently scary to prompt early tapering of stimulus.

Year-on-year consumer prices did rise 5%, the biggest jump in nearly 13 years, but big contributions from price rises for airline tickets and used cars were seen as unsustainable and in keeping with the Fed’s forecasts for a temporary spike.

“The market is short bonds, and has been trading that re-flation theme since last September,” said Imre Speizer, a market strategist at Westpac in New Zealand.

“Traders have been holding on to old, stale positions and the market needs news to endorse those positions. This didn’t endorse it, so more of those traders have just capitulated,” he said.

Short positions in Treasuries had hit their highest since 2018, according to JP Morgan positioning data last week.

Their unwinding has flatted the yield curve to push the gap between 10-year and policy-sensitive 2-year bonds to 128.4 basis points, the narrowest in three months.

At the long end of the curve, 20-year yields also hit a three-month low in Asia trade on Friday, while 30-year yields fell to 2.123%, the lowest since late February.

The drop in yields has also tugged on the U.S. dollar and put downward pressure on global yields, with Australian 10-year government bond yields down 22 basis points for the week. (Reporting by Tom Westbrook; Editing by Ana Nicolaci da Costa)

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