TREASURIES-Yields lower as China data renews global economy concerns

(Adds details, updates prices) By Davide Barbuscia NEW YORK, Aug 15 (Reuters) - U.S. Treasury yields fell slightly on Monday as weak economic data from China renewed concerns over the health of the global economy, while the market continued to assess how much an inflation slowdown could affect U.S. Federal Reserve monetary tightening policies. In a surprise move, China's central bank cut key lending rates on Monday to revive demand as key economic indicators slowed in July, with factory and retail activity impacted by Beijing's zero-COVID policy and a property crisis. "China is the second biggest economy so if there's a material slowdown there and China feels like it has to cut rates, that says something about the strength of the global economy," said Steven Abrahams, senior managing director at Amherst Pierpont Securities. U.S. economic data on Monday signaled slowing activity as a result of the Fed's efforts to curb demand as it fights four-decade high inflation. U.S. single-family homebuilders' confidence and New York state factory activity fell in August to their lowest since near the start of the COVID pandemic. The U.S. central bank has raised its benchmark overnight interest rate by 225 basis points since March and is expected to raise its policy rate by another 50 or 75 basis points at its next meeting on Sept. 20-21. The rapid tightening of financial conditions, however, has fueled recessionary concerns. Benchmark 10-year Treasury yields were down at 2.791% on Monday from a 2.849% close last week. Two-year note yields fell to 3.2% from 3.257%. Data last week showed U.S. producer prices unexpectedly fell in July and the Consumer Price Index (CPI) for July was unchanged on the month, but up at an annual rate of 8.5%. While this suggested a peak in inflation increases and therefore a possible slowdown in the Fed's rate hikes, many in the market remained skeptical and said more evidence of a decline in price pressure was needed. "One encouraging CPI report does not constitute a new and durable inflation trend," Glenmede investment strategists said in a research note on Monday. "With core CPI still growing at a near 6% clip on an annual basis, it's far from mission accomplished." Fed funds futures traders are now pricing in a 59.5% chance of a 50-basis-point hike in September and a 40.5% chance of a 75-basis-point increase. They expect the fed funds rate to hit about 3.6% in March and decline after that. "Everybody is still trying to figure out where they think the Fed will go next year," said Abrahams. "Our feeling is that the market continues to underestimate how high terminal Fed funds will go, so we're expecting the yield curve to continue inverting pretty significantly," he said, referring to the point where the federal funds rate will peak. The closely watched yield curve between two- and 10-year notes was at minus 41.1 basis points on Monday. It reached minus 56 basis points on Wednesday last week, the deepest inversion since 2000. An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in 12-18 months. August 15 Monday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 2.5375 2.5884 0.025 Six-month bills 2.9875 3.0741 0.007 Two-year note 99-159/256 3.2008 -0.056 Three-year note 99-250/256 3.1332 -0.061 Five-year note 99-64/256 2.9134 -0.064 Seven-year note 98-128/256 2.8642 -0.062 10-year note 99-164/256 2.7914 -0.058 20-year bond 99-28/256 3.3116 -0.026 30-year bond 98-28/256 3.0972 -0.021 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 30.25 0.25 spread U.S. 3-year dollar swap 11.50 -0.50 spread U.S. 5-year dollar swap 3.25 -1.00 spread U.S. 10-year dollar swap 3.50 -1.25 spread U.S. 30-year dollar swap -32.75 -1.50 spread (Reporting by Davide Barbuscia; editing by Ed Osmond and Richard Chang)

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