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TREASURIES-U.S. bond yields rise on confusion over U.S. trade move

By Richard Leong

* U.S. keeps ban on government business with China's Huawei * U.S may let firms trade with Chinese telecom firm * Italy's political woes rattle confidence on euro zone (Updates market action; adds quotes) By Richard Leong NEW YORK, Aug 9 (Reuters) - U.S. Treasury yields rose on Friday amid confusion over the United States policy on trade with China, while political turmoil in Italy compounded investor concerns, capping a volatile week in the bond market. Treasury yields fell for a second week, though they stayed above the multi-year lows set on Wednesday when the yield on the 30-year bond came within striking distance of a record low. Adding to investors' jitters was news that the British economy unexpectedly contracted in the second quarter, the first time since 2012, as Prime Minister Boris Johnson prepares to pull the country out of the European Union in October. "Global economic data continue to trend lower. We like bonds as a diversifier," said Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis. Trade tensions between China and United States remain the main driver for financial markets. President Donald Trump said on Friday the United States is not going to do business with Chinese telecom giant Huawei. His comments supported an earlier Bloomberg report that said Washington was delaying a decision to allow some trade between U.S. firms and China's telecom equipment maker Huawei again. Trump's remarks were seen as the latest U.S. move pushing the world's two biggest economies toward a full-blown trade war that could spark a global downturn and stoke more turbulence in financial markets. Wall Street shares fell and pushed bond yields lower. Bond yields reversed to move higher after Fox Business reporter Edward Lawrence posted a tweet citing a White House official saying that Trump meant "ONLY the ban on Federal Departments buying from Huawei. White House Official says Commerce Dept Process for special licenses still going forward." "It created a whole level of uncertainty and that's not good," said Mary Ann Hurley, vice president of fixed income at D.A. Davidson in Seattle. Worries about Italy, the euro zone's third biggest economy, were rekindled late on Thursday after its deputy prime minister, Matteo Salvini, sought snap elections following a period of public fighting between Salvini's League party and coalition partner the anti-establishment 5-Star Movement. In late U.S. trading, benchmark 10-year Treasury yields were 2.1 basis points higher at 1.736%. They hit 1.595% on Wednesday, which was their lowest level since October 2016. Ten-year yields fell for a second week, marking their steepest two-week drop in nearly eight years, according to Refinitiv data. The yield on the 30-year, or long, bond was up 0.9 basis point at 2.256%. On Wednesday, the 30-year yield fell to 2.123%, within striking distance of the all-time low of 2.089% set in July 2016, according to Refinitiv data. Longer-dated yields were supported earlier by data that showed U.S. domestic producer prices grew modestly in July, with core prices posting their first decline since October 2015. Sluggish inflation, together with trade and geopolitical turmoil, reinforced traders' expectations the Federal Reserve will lower its key lending rate by at least a quarter point at its next policy meeting, on Sept. 17-18. Interest rates futures implied traders expect the U.S. central bank may cut rates at each of its remaining policy meetings this year, according to CME Group's FedWatch program. August 9 Friday 4:13PM New York / 2013 GMT Price US T BONDS SEP9 161-8/32 -10/32 10YR TNotes SEP9 129-180/256 -7/32 Price Current Net Yield % Change (bps) Three-month bills 1.9575 1.9941 -0.029 Six-month bills 1.9025 1.9526 -0.010 Two-year note 100-58/256 1.6324 0.015 Three-year note 99-204/256 1.5696 0.025 Five-year note 100-228/256 1.5629 0.026 Seven-year note 101-136/256 1.6415 0.026 10-year note 99 1.7344 0.019 30-year bond 99-244/256 2.2522 0.005 YIELD CURVE Last (bps) Net Change (bps) 10-year vs 2-year yield 9.90 0.45 30-year vs 5-year yield 68.80 1.05 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap -1.50 1.50 spread U.S. 3-year dollar swap -4.00 1.25 spread U.S. 5-year dollar swap -7.25 1.00 spread U.S. 10-year dollar swap -12.00 1.50 spread U.S. 30-year dollar swap -41.75 1.25 spread (Reporting by Richard Leong; Editing by Leslie Adler)