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TREASURIES-Yields fall U.S.-China trade war escalates

By Karen Brettell

(Updates prices) * China unveils tariffs, Trump vows response * Fed's Powell says will act to sustain expansion * U.S. rate cut in September seen as certain By Karen Brettell NEW YORK, Aug 23 (Reuters) - Benchmark U.S. Treasury yields fell to their lowest levels in a week on Friday as an escalation in the U.S.-China trade war raised concerns about an economic downturn. China said on Friday it will impose an extra 5% tariff on U.S. soybeans from Sept 1, and additional 10% duties on U.S. wheat, corn and sorghum from Dec. 15, in Beijing's latest retaliatory trade measures against Washington. U.S. President Donald Trump said he would respond to the tariffs later on Friday and that he was ordering U.S. companies to look at ways to close their operations in China and make more of their products in the United States instead. “This is a clear sign of an escalation of a trade war,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. The trade war is weighing on business sentiment even as investors are already worried about slowing international growth. Trump’s comments come after Federal Reserve Chairman Jerome Powell said that the U.S. central bank will “act as appropriate” to keep the economic expansion on track, but noted rising risks. "He did talk about all the risks that have happened since the July meeting, and that suggests that he is allowing the markets to price in a September move," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. Minutes of the Fed’s July meeting released on Wednesday showed that policymakers were divided on cutting rates in July, and were united in wanting to avoid the appearance of being on the path to further rate cuts. But the bond market has priced in a far more bearish picture of the economy since the Fed’s July meeting. The two-year, 10-year yield curve inverted last week for the first time since 2007, a signal that a recession is likely in one to two years. The curve has traded in and out of inversion for the past three days. Interest rate futures traders are pricing in a 100% chance of a rate cut at the Fed’s September meeting, up from 96% before Powell's comments, according to the CME Group’s FedWatch tool. Benchmark 10-year notes were last up 26/32 in price to yield 1.522%, down from 1.610% late on Thursday. The two-year, 10-year yield curve was last inverted by 0.50 of a basis point. (Editing by Bernadette Baum, Jonathan Oatis and David Gregorio) )