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TREASURIES-U.S. yields rise on China trade deal progress; Fed looms

By Gertrude Chavez-Dreyfuss

* U.S., China 'close to finalizing' parts of Phase 1 trade pact * U.S. 5-year, 7-year, 10-year yields hit five-week high * U.S. two-year yields touch three-week peak * Fed widely seen cutting rates by 25 basis points next week (Recasts, updates prices, adds comment) By Gertrude Chavez-Dreyfuss NEW YORK, Oct 25 (Reuters) - U.S. Treasury yields rose on Friday after the United States said it was close to finalizing parts of a trade deal with China, suggesting that with global risks easing the Federal Reserve may not have to be aggressive in cutting interest rates this year and next. Yields on U.S. five-year, seven-year, and benchmark 10-year notes climbed to a five-week peaks, while those on two-year notes hit a three-week high. On Friday, the U.S. Trade Representative's office said U.S. and Chinese trade officials were "close to finalizing" some parts of an agreement after high-level telephone discussions. The USTR provided no details though. "The sell-off got more intense on the front-end today and I think this speaks to the fact that the Fed has remained accommodative more than they needed to because of Brexit and the trade war tail risks," said Michael Chang, U.S. rates strategist at Societe Generale in New York. "But now with both risks reducing by a good amount the last few weeks, the general view is that the Fed is still going to cut, but beyond that, they can afford to take a pause. So more follow-up cuts is not a sure thing anymore," he said. In afternoon trading, U.S. 10-year note yields edged up to 1.796% from 1.766% late on Thursday. Yields on 30-year bonds advanced to 2.288%, from 2.259% on Thursday. On the short-end of the curve, U.S. two-year yields rose to 1.623%, from Thursday's 1.582%. Prior to the China trade news, U.S. yields were little changed, trading without direction for the most part over the last two to three days. "Realized volatility in the last two weeks has been very compressed and seems to have bled out all the bearish momentum leading into the month of October," said Guy LeBas, chief fixed income strategist, at Janney Montgomery Scott in Philadelphia. Next week's Federal Open Market Committee policy meeting is widely expected to result in a cut in interest rates of 25 basis points, and that has been priced in. But some analysts expect a "hawkish" or more aggressive cut, which would mainly be for insurance purposes and not because the U.S. economy desperately needs it. Analysts at NatWest Markets said the Fed is near the tipping point between "insurance" cuts and a more prolonged cutting cycle. "But we suspect Fed signaling, both in its statement and press conference, will suggest that the Fed still sees itself in a meeting-to-meeting, insurance cutting mode," Natwest said in a note. The bank believes that for now, the FOMC is divided about making a dovish shift especially amid shifting expectations around Brexit and U.S.-China trade negotiations. October 25 Friday 3:27 PM New York / 1927 GMT Price Current Net Yield % Change (bps) Three-month bills 1.6375 1.6714 -0.003 Six-month bills 1.6225 1.6629 0.005 Two-year note 99-193/256 1.6256 0.044 Three-year note 99-74/256 1.6215 0.039 Five-year note 99-104/256 1.6241 0.039 Seven-year note 99-112/256 1.7106 0.035 10-year note 98-116/256 1.7978 0.032 30-year bond 99-40/256 2.2891 0.030 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 2.50 -0.75 spread U.S. 3-year dollar swap -1.50 -0.50 spread U.S. 5-year dollar swap -3.00 -1.00 spread U.S. 10-year dollar swap -8.50 -0.50 spread U.S. 30-year dollar swap -38.50 -0.50 spread (Reporting by Gertrude Chavez-Dreyfuss Editing by Alistair Bell and Tom Brown)