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TREASURIES-Yields fall as dovish central bank policy supports debt

By Karen Brettell

(Adds debt ceiling talks, updates prices) * ECB expected to give dovish signal on Thursday * Fed expected to cut rates by 25 bps this month * Treasury to sell $113 billion notes this week By Karen Brettell NEW YORK, July 22 (Reuters) - U.S. Treasury yields fell on Monday and the yield curve flattened as dovish global central bank policy supported demand for government debt, with no major new events to set market direction. The European Central Bank (ECB) is expected to signal easier monetary policy when it meets on Thursday. The Federal Reserve is also seen as certain to cut its benchmark rate at its July 30-31 meeting. "The ECB as well as the Fed are both about to move into a more accommodative monetary policy stance in the very near term," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. The Fed has signaled that a rate cut is likely as the prolonged U.S.-China trade war dents business confidence, global manufacturing slows down and inflation remains below the Fed's 2% annual target. Expectations that the U.S. central bank could make a 50 basis point cut rose last week after New York Fed President John Williams argued for fast action to stave off economic weakness, but receded after the New York Fed said the comments were not about upcoming policy action. The odds of a deeper cut also fell on Friday after the Wall Street Journal wrote that the Fed is likely to cut rates by 25 basis points and that policymakers are not prepared for a 50 basis point rate decrease. St. Louis Federal Reserve President James Bullard said on Friday he would like a 25 basis point cut to give the Fed options for later this year. Benchmark 10-year notes gained 3/32 in price to yield 2.04%, down from 2.05% late on Friday. The yield curve between two-year and 10-year notes flattened to 23 basis points, from 24 basis points on Friday. U.S. congressional and White House negotiators are close to a deal to extend the Treasury Department's borrowing authority until July 31, 2021, a source said on Monday. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have been holding talks to reach a deal before Congress begins a five-week summer recess. Without such a deal, Treasury could bump up against its borrowing limit before Sept. 9, when Congress is set to return. The Treasury Department this week will sell $113 billion in short and intermediate-dated notes, including $40 billion in two-year notes on Tuesday, $41 billion in five-year notes on Wednesday and $32 billion in seven-year notes on Thursday. (Reporting by Karen Brettell; Editing by Andrea Ricci) )