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TREASURIES-U.S. yields tumble as Europe gas fears drive safe-haven buying

·4 min read

(Adds remark, auction results) By Herbert Lash NEW YORK, July 26 (Reuters) - U.S. Treasury yields trended lower on Tuesday, driven by a flight to safety following the latest supply cuts in gas supply from Russia to Europe and growing concerns about a U.S. economic slowdown as seen in Walmart's profit warning. The yield differential in two- and 10-year Treasury notes , seen as a recession signal when the short-end yield is higher than the long end, has been inverted for more than two weeks and widened a bit further at -25.7 basis points. After earlier moving lower, the two-year yield rose 2.2 basis points to 3.057%, as the decline in 10-year notes fell 1.9 basis points to 2.801%. "The flight to quality makes sense if you're concerned about a meaningful slowdown in growth or even heightened recession fears in Europe because of volatility in energy supply," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. "Then you should see investors flock to Treasuries." After a morning rally in prices, which move in the opposite direction of yields, bonds trimmed gains, perhaps anticipating a widely expected interest rate hike of 75 basis points by the Federal Reserve on Wednesday when a two-day policy meeting ends. The Fed's statement on Wednesday is likely to emphasize how far inflation is from its 2% target, rather than the drag that policy appears to be having on the pace of economic activity, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC. "This continued focus on inflation should reset market expectations and lead to further inversion of the 2-year/10-year portion of the curve, principally through rising short rates," Ricchiuto said in a note. The Treasury sold $46 billion of five-year notes at a high yield of 2.860%. Demand was decent, Rajappa said. The Treasury will auction $38 billion of seven-year notes on Thursday. Shares of Walmart Inc fell 7.9% after the big U.S. retailer slashed its profit forecast, a stark indication of the pullback its customers have made in discretionary purchases as they struggle with the impact of high inflation. Another closely watched part of the yield curve, the gap between three-month bills and 10-year notes, narrowed to 27.1 basis points, down from a spread of 118.51 at the close on July 1. An inversion could spell recession. Russia tightened its gas squeeze on Monday. Gazprom said supplies through the Nord Stream 1 pipeline to Germany would drop to just 20% of capacity. The supply crunch and calls for energy rationing are likely to tip the euro currency bloc into recession, while inflation remains high. The yield on the 30-year Treasury bond was down 2.6 basis points to 3.024%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.589%. The 10-year TIPS breakeven rate was last at 2.359%, indicating the market sees inflation averaging about 2.4% a year for the next decade. The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.404%. July 26 Tuesday 3:19PM New York / 1919 GMT Price Current Net Yield % Change (bps) Three-month bills 2.48 2.5305 -0.031 Six-month bills 2.895 2.9789 -0.010 Two-year note 99-228/256 3.0568 0.022 Three-year note 99-250/256 3.0081 0.025 Five-year note 101-150/256 2.9019 0.002 Seven-year note 102-72/256 2.8841 -0.011 10-year note 100-156/256 2.8032 -0.017 20-year bond 99-176/256 3.2713 -0.023 30-year bond 97-12/256 3.026 -0.024 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 23.25 0.75 spread U.S. 3-year dollar swap 8.75 0.75 spread U.S. 5-year dollar swap 0.50 1.00 spread U.S. 10-year dollar swap 7.50 0.25 spread U.S. 30-year dollar swap -24.50 1.00 spread (Reporting by Herbert Lash Editing by Mark Heinrich)