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TREASURIES-U.S. yield curve inverts further amid supply, trade worries

By Richard Leong

* Trump on China: "I think they want to make a deal very badly" * U.S. to sell $113 bln in fixed-rate, coupon-bearing debt * U.S. durable goods orders unexpectedly rise in July (Updates market action, adds quote) By Richard Leong NEW YORK, Aug 26 (Reuters) - The U.S. yield curve inverted further on Monday with yields on shorter-dated yields rising more than longer-dated ones, as upcoming supply of shorter-maturity Treasury debt outweighed the easing of trade tensions between China and the United States. The U.S. Treasury Department will sell $113 billion in fixed-rate debt supply this week, starting with a $40 billion auction of two-year notes on Tuesday. Benchmark 10-year Treasury yields slid to 1.443% earlier on Monday, their lowest since July 2016, as another round of tit-for-tat tariffs between the world's biggest economies last week touched off a wave of safe-haven demand for low-risk government bonds. On Friday, U.S. President Donald Trump announced an additional duty on some $550 billion of targeted Chinese goods, hours after China unveiled retaliatory tariffs on $75 billion worth of U.S. goods. By Monday, Trump and Chinese leaders sought to ease trade tensions that triggered steep stock market sell-offs around the world. Trump told a press conference after the G7 summit in France: "I think they want to make a deal very badly." Analysts were not as optimistic. "It's a lot of mixed messages," said Gennadiy Goldberg, senior interest rates strategist at TD Securities. "It's hard to trade in this environment purely on data." Domestic orders for durable goods unexpectedly rose in July but shipments fell by the most in nearly three years, suggesting capital investment remained sluggish. On the open market, yields on two-year notes fell as low as 1.449%, their lowest since September 2017. They subsequently moved up 2.00 basis points to 1.549%. Ten-year Treasury yields were 1.540%, 1.30 basis points higher on the day, rebounding from a three-year low of 1.443% set earlier on Monday. The inversion between two-year and 10-year yields deepened to -1.7 basis points from -0.2 basis points late on Friday. The yield curve has often inverted prior to recent U.S. recessions. The U.S.-China trade war has put the Federal Reserve in a tough spot as policymakers cite its disruption of global business activities as a risk to the domestic economy. On Friday, Fed Chair Jerome Powell said the central bank would "act as appropriate" to sustain the longest-ever U.S. economic expansion. But he did not pledge that the Fed was ready to embark on a series of interest rate cuts. Interest rates futures implied traders expect the Fed to lower rates by a quarter point at its Sept. 17-18 policy meeting, following its first rate decrease since 2008 in July. Fed funds contracts suggested the Fed would cut rates at least one more time after September, CME Group's FedWatch program showed. August 26 Monday 2:39PM New York / 1839 GMT Price US T BONDS SEP9 165-10/32 -7/32 10YR TNotes SEP9 130-212/256 -4/32 Price Current Net Yield % Change (bps) Three-month bills 1.95 1.9918 0.028 Six-month bills 1.8425 1.8903 0.020 Two-year note 100-98/256 1.5473 0.018 Three-year note 100-24/256 1.4675 0.018 Five-year note 101-134/256 1.4286 0.020 Seven-year note 102-144/256 1.4843 0.011 10-year note 100-204/256 1.5384 0.011 30-year bond 105-16/256 2.0238 0.000 YIELD CURVE Last (bps) Net Change (bps) 10-year vs 2-year yield -1.00 -1.15 30-year vs 5-year yield 59.40 -1.30 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap -1.50 0.25 spread U.S. 3-year dollar swap -3.75 0.00 spread U.S. 5-year dollar swap -5.50 0.25 spread U.S. 10-year dollar swap -8.75 0.50 spread U.S. 30-year dollar swap -39.00 1.00 spread (Reporting by Richard Leong in New York and Dhara Ranasinghe in LONDON; Editing by Dan Grebler and Tom Brown)