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TREASURIES-U.S. yields gain, in line with Europe, as risk sentiment improves

By Gertrude Chavez-Dreyfuss

(Recasts, adds new analyst comment, updates prices) * U.S. yields climb to three-week peaks * Germany says considering new agencies to take on new debt * Markets expect less aggressive ECB * ECB cut still likely, but measure in place to limit impact * TD still sees lower rates; 10-year seen down at 1.25% by yearend By Gertrude Chavez-Dreyfuss NEW YORK, Sept 9 (Reuters) - U.S. Treasury yields rose to three-week highs on Monday, in line with gains in the European bond market, as risk appetite improved amid easing U.S.-China trade tensions and expectations of less-aggressive action from the European Central Bank this week. Yields on U.S. debt, from two-year notes to 30-year bonds, all hit peaks after rising in two of the last three sessions, as investors grew less nervous about the U.S.-China trade war. Washington and Beijing have agreed to go back to the negotiating table. Treasuries are also moving in sympathy with the European bond market, which was undermined by a Reuters report that Germany is considering setting up independent public agencies that could take on new debt to invest in the country's flagging economy without falling foul of strict national spending rules. "To a large extent a lot of the safe-haven buying is coming off," said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco. "We also saw European bond yields close sharply higher. I think part of that is that easing expectations from the ECB have been scaled back." The European Central Bank meets on Thursday. Money markets show investors expect a 10 basis-point cut in the deposit rate to -0.50% in the first cut since 2016. Action Economics in its blog, however, noted that a tiered system to limit the impact of the ECB rate cut on banks is being planned. There may be a small asset purchase program, but nothing major for now, it said. Rupert also added that similarly with the Federal Reserve, there was a time when the market priced in a 50 basis-point cut. "That expectation has come off as well because we have seen some stronger-than-expected U.S. data and of course because of hopes that trade talks are back on and could see some resolution," Rupert said. In afternoon trading, U.S. benchmark 10-year Treasury note yields rose to 1.63% from 1.55% late on Friday. Early in the session, 10-year yields hit a three-week high of 1.635%. Since the beginning of the year, 10-year yields have fallen more than 100 basis points. Yields on 30-year bonds advanced to 2.108% from 2.022% on Friday, up from record lows of 1.905% touched in late August. U.S. 30-year yields hit a three-week peak of 2.116%. At the short end of the curve, U.S. two-year yields rose to 1.58% from Friday's 1.528%. Gennadiy Goldberg, senior rates strategist at TD Securities in New York, said U.S. yields are in a short-term correction mode and could still go lower from here. TD expects the 10-year yield to fall to 1.25% by the end of the year. September 9 Monday 3:26 PM New York / 1926 GMT Price Current Net Yield % Change (bps) Three-month bills 1.9225 1.9582 -0.006 Six-month bills 1.825 1.8722 0.000 Two-year note 99-216/256 1.5807 0.053 Three-year note 99-238/256 1.5245 0.061 Five-year note 98-226/256 1.4839 0.064 Seven-year note 98-192/256 1.5649 0.067 10-year note 99-252/256 1.6267 0.077 30-year bond 103-52/256 2.1052 0.083 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap -0.50 1.00 spread U.S. 3-year dollar swap -5.00 0.75 spread U.S. 5-year dollar swap -6.25 1.00 spread U.S. 10-year dollar swap -11.25 0.75 spread U.S. 30-year dollar swap -41.50 0.75 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio and Dan Grebler)