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TREASURIES-Yields tumble to two-week lows on recession fears

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(Adds quotes, updates prices) By Karen Brettell NEW YORK, June 23 (Reuters) - U.S. Treasury yields fell to two-week lows on Thursday on concerns that the Federal Reserve will cause a recession by aggressively hiking interest rates, and on a growing belief that yields may have topped for the near term even if inflation stays high. Yields have dropped from more-than-decade highs reached before last week’s Fed meeting, when the U.S. central bank hiked rates by 75 basis points, the biggest increase since 1994, and signaled a similar move is possible in July. Fed Chairman Jerome Powell will testify before Congress for a second day on Thursday, a day after saying the Fed is not trying to engineer a recession to stop inflation but is fully committed to bringing prices under control even if doing so risks an economic downturn. There are “growing recession fears,” said Benjamin Jeffery, an interest rate strategist at BMO Capital Markets, noting that Powell’s tone on Wednesday was “a bit more cautious.” As concerns about a recession increase, Jeffery says 10-year yields could drop back to the 2.50%-to-2.75% area, “especially if we started to see even more concerning economic data and even maybe some slowing in terms of hiring.” Benchmark 10-year yields were at 3.111%, after reaching 3.498% on June 14, the highest since April 2011. Two-year Treasury yields fell to 2.994%. They have been down from 3.456% on June 14, which was the highest since November 2007. The closely watched yield curve between two-year and 10-year notes was at 12 basis points, after inverting early last week. An inversion in this part of the curve is seen as a reliable indicator that a recession is likely in one to two years. Fed funds futures traders have pared back expectations on how high the Fed is likely to raise its benchmark rate. They are now pricing for the rate to peak at 3.51% in March, down from expectations last week that it would increase to around 4%. It is currently 1.58%. Bonds were boosted earlier on Thursday after data showed that euro zone business growth has slowed significantly this month - and by much more than expected - as consumers concerned about soaring bills opted to stay at home and defer purchases to save money. U.S. data on Thursday showed that the number of Americans filing new claims for unemployment benefits edged down last week as labor market conditions remained tight, though some slowing is emerging. Inflation expectations also fell on Thursday. Breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS), a measure of expected annual inflation for the next five years, fell as low as 2.70%, the lowest since Feb. 8. They are down from a five-week high of 3.25% reached on June 13. The Treasury will sell $18 billion in five-year TIPS on Thursday. June 23 Thursday 9:15AM New York / 1315 GMT Price Current Net Yield % Change (bps) Three-month bills 1.575 1.6032 0.010 Six-month bills 2.3275 2.3878 -0.018 Two-year note 99-20/256 2.9935 -0.063 Three-year note 99-90/256 3.1046 -0.091 Five-year note 97-160/256 3.1482 -0.079 Seven-year note 97-96/256 3.1745 -0.062 10-year note 98 3.1112 -0.045 20-year bond 96-184/256 3.4798 -0.012 30-year bond 93-72/256 3.2269 -0.015 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 36.75 -2.50 spread U.S. 3-year dollar swap 15.75 -0.75 spread U.S. 5-year dollar swap 3.75 0.00 spread U.S. 10-year dollar swap 7.50 0.25 spread U.S. 30-year dollar swap -25.25 0.25 spread (Reporting by Karen Brettell; Additional reporting by Dhara Ranasinghe in London; Editing by Jonathan Oatis)