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TREASURIES-U.S. yields drop as new virus fears escalate

By Gertrude Chavez-Dreyfuss

* U.S. 10-year, 30-year yields drop to multi-month lows * U.S. 2-year note yields fall to two-week lows * U.S. yield curve flattens again, tightest gap in 5 weeks * FOMC meets next week, likely to keep rates unchanged (Adds new comment, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, Jan 24 (Reuters) - U.S. Treasury prices advanced on Friday, pushing yields lower for a fourth straight session, as news of the latest coronavirus spreading outside China continued to undermine risk appetite and spur demand for safe-haven assets. U.S. 30-year yields declined to a nearly three-month low, while those on benchmark 10-year notes dropped to more than two-month troughs. U.S. two-year notes also slid, dropping to a two-week low. U.S. 10-year yields have lost nearly 15 basis points this week, their largest weekly drop in about 3-1/2 months. Thirty-year yields, meanwhile, have fallen roughly 16 basis points this week, the biggest weekly decline in four months. As rates fell, the yield curve flattened again on Friday as market sentiment took a hit amid a host of unknowns about the Chinese coronavirus. The spread between the two-year and 10-year note yields contracted to as low as 18.78 basis points , the narrowest gap in five weeks. "The virus clearly in the short term has spooked the market," said Gregory Faranello, head of U.S. rates at Amerivet Securities in New York. On Friday, China shut part of the Great Wall and suspended public transport in 10 cities, stranding millions of people at the start of the Lunar New Year holiday. Authorities rush to contain a virus that has killed 26 people and infected more than 800 already. The virus has also spread to the United States, Asia, and parts of Europe. "The economic impact of the Wuhan coronavirus is ... (an) unknown with potential downside skew. The quarantine of Wuhan and surrounding cities is already restricting travel, and fear of exposure could further restrict economic activity," said Chris Low, chief economist, at FHN Financial. It may not constitute a material threat to growth forecasts if contained, Low said. But he said experts worry that it may be too late to prevent the disease from going global. "If that happens, growth will weaken worldwide. Any recovery after the virus is contained is not clear this early in the process," Low added. In afternoon trading, U.S. 10-year yields fell to 1.682%, from 1.739% late on Thursday. Earlier in the session, 10-year yields fell to more than two-month lows of 1.67%. Yields on U.S. 30-year bonds were at 2.14%, down from 2.182% on Thursday. Thirty-year yields earlier fell to nearly three-month troughs of 2.121%. On the short end of the curve, U.S. two-year yields fell to 1.494% from Thursday's 1.518%, after hitting a two-week low of 1.478% earlier in the session. The Federal Reserve is expected to meet next week for a monetary policy meeting and will likely hold interest rates steady. January 24 Friday 3:30 PM New York/2030 GMT Price Current Net Yield % Change (bps) Three-month bills 1.5 1.5305 -0.025 Six-month bills 1.5075 1.5441 -0.018 Two-year note 100-63/256 1.4947 -0.023 Three-year note 100-14/256 1.481 -0.032 Five-year note 101-32/256 1.5121 -0.043 Seven-year note 100-232/256 1.6111 -0.048 10-year note 100-132/256 1.6926 -0.046 30-year bond 105-16/256 2.1442 -0.038 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 6.00 -0.25 spread U.S. 3-year dollar swap 3.50 0.00 spread U.S. 5-year dollar swap 0.50 0.00 spread U.S. 10-year dollar swap -5.25 0.00 spread U.S. 30-year dollar swap -31.75 -0.25 spread (Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis and Tom Brown)