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TREASURIES-Yields pare declines after coronavirus worry sends 10-year below 1.25%

By Ross Kerber

(Updates with market activity) By Ross Kerber BOSTON, Feb 27 (Reuters) - U.S. Treasury yields steadied following sharp declines on Thursday as coronavirus concerns led investors to pile into safe-haven assets, with the yield on the benchmark 10-year note reaching an all-time low for the third consecutive day. A volatile trading session left the yield on the 10-year note down 1 basis point in afternoon trading at 1.3004%, having earlier reached a new record low of 1.2408% and then briefly turning positive. Yields on other Treasuries also fell, including on the 30-year bond, which also hit a new low before steadying. Analysts said the rush to safety came as more coronavirus cases were reported worldwide, drawing buyers for U.S. government debt from among investors dumping equities and other assets, as well as regular fixed-income customers. "The Treasury market is truly the risk-free asset for everybody," said Michael Kushma, chief investment officer of global fixed income at Morgan Stanley Investment Management. How long the dynamic lasts depends on whether U.S. companies start to lay off workers, which could lead to declines in consumer spending, he said, adding the U.S. Federal Reserve is likely tracking the same issue. "The key factor of how this will play out for the Fed is if the labor market stays okay," Kushma said. Yields recovered somewhat from midmorning lows as investors tried to predict how corporations and central bankers might respond to disruptions. European Central Bank President Christine Lagarde played down the economic impact of the coronavirus epidemic in an interview published on Thursday, saying it was not yet causing lasting economic damage. The U.S. yield curve, measured as the difference between yields on two- and 10-year Treasury notes, was at 19 basis points, up 5 basis points from Wednesday. The steepening reflected how the yield of the two-year note, which typically moves in step with interest rate expectations, fell more than the yield of the 10-year. The yield on the two-year was 3.8 basis points lower in afternoon trading at 1.1071%, close to its lowest since late 2016. Wall Street's main indexes fell for the sixth straight session and confirmed they entered a correction after setting record highs this month. Officials have ramped up efforts to guard against the virus's spread in the United States, where the number of confirmed cases is still relatively small at 60, most of them repatriated American passengers from the Diamond Princess cruise ship docked in Japan. In addition the Commodity Futures Trading Commission said it is closely monitoring trading as concerns about the epidemic pushed oil futures to their lowest in a year and roiling wheat and corn markets. The outbreak has reached a "decisive point," the head of the World Health Organisation (WHO) said on Thursday, urging countries to redouble efforts to contain it. Goldman Sachs said U.S. companies will generate no earnings growth in 2020 as the coronavirus spreads, deepening risks to global growth. Growing uncertainty about the virus has driven bond yields steadily lower since January. While yields tended to trade within set ranges in 2019, largely determined by developments in the U.S.-China trade negotiations, this year's trading has been tied to more unpredictable news about the coronavirus outbreak, said Jonathan Cohn, Credit Suisse interest rate strategist. "In the trade war the administration (of U.S. President Donald Trump) had a lot more control over the ebb and flow of headlines, compared to an epidemic where governments globally are trying to contain it," Cohn said. On Thursday the U.S. Treasury Department said it accepted $32 billion in bids for seven-year notes out of $79.6 billion worth of public bids tendered, at a high yield of 1.247%. Primary dealers accounted for 24% of competitive bids accepted. The yield was the lowest on such an auction since April of 2013, said BMO Capital Markets strategist Ben Jeffery. "Buyers are out there and they're willing to pay up for Treasuries," he said. February 27 Thursday 3:28PM New York / 2028 GMT Price Current Net Yield % Change (bps) Three-month bills 1.42 1.4488 -0.069 Six-month bills 1.295 1.3252 -0.088 Two-year note 100-9/256 1.1071 -0.038 Three-year note 100-210/256 1.093 -0.032 Five-year note 100-20/256 1.1089 -0.018 Seven-year note 101-224/256 1.2167 -0.012 10-year note 101-220/256 1.3004 -0.010 30-year bond 104-180/256 1.7963 -0.002 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 3.75 0.00 spread U.S. 3-year dollar swap 1.50 0.25 spread U.S. 5-year dollar swap 1.25 1.00 spread U.S. 10-year dollar swap -5.50 0.25 spread U.S. 30-year dollar swap -37.75 0.00 spread (Reporting by Ross Kerber; Editing by David Gregori, Chris Reese and Cynthia Osterman)