×

TREASURIES-U.S. yields fall as euro hits near two-year peak

* European yields fall as euro hits near two-year peak vs dollar

* U.S. one-month rate volatility at record low -BAML data

* Trading volume light in absence of major U.S. economic data

NEW YORK, July 21 (Reuters) - U.S. Treasury yields fell on Friday in step with European yields as the euro hit a near two-year high against dollar, raising doubts whether the European Central Bank would scale back its bond purchases later in 2017. Medium and longer-dated yields touched three-week lows as benchmark German 10-year yields hit a two-week trough. The euro's surge, if sustained, would hurt European exporters and possibly force ECB policymakers to delay any plans to reduce quantitative easing. "This is a directionality with the euro. The U.S. and Bunds spread is moving on that after the ECB meeting," Subadra Rajappa, head of U.S. rates strategy at SG Corporate & Investment Banking in New York. On Thursday, the ECB stuck to its ultra-loose policy stance as Europe's inflation remained below 2 percent, but currency traders perceived ECB President Mario Draghi's comments at his news conference as supportive to build bullish bets on the euro . The single currency rose to $1.1677 earlier on Friday, the strongest since Aug. 24, 2015, while German 10-year yields traded as low as 0.496 percent, a two-week trough, Reuters data showed. At 10:40 a.m. (1440 GMT), the benchmark 10-year Treasury yield was down more than 2 basis points at 2.243 percent after hitting a three-week low of 2.236 percent. Trading volume was light in the absence of major U.S. economic data and some caution ahead of the Federal Reserve's two-day policy meeting that will begin on Tuesday. Expectations that the U.S. central bank will leave key overnight borrowing costs unchanged partly fed the decline in short-term interest rate volatility. An index compiled by Bank of America Merrill Lynch on one-month volatility on Treasury yields has fallen in the past two weeks, recording an all-time low of 46.999 on Thursday. July 21 Friday 10:39AM New York / 1439 GMT Price

US T BONDS SEP7 154-20/32 0-18/32 10YR TNotes SEP7 126-64/256 0-48/256 Price Current Net Yield % Change

(bps)

Three-month bills 1.145 1.1641 0.020 Six-month bills 1.0925 1.1137 -0.002 Two-year note 99-208/256 1.3484 -0.012 Three-year note 99-254/256 1.5026 -0.010 Five-year note 99-186/256 1.8081 -0.015 Seven-year note 99-164/256 2.0558 -0.022 10-year note 101-40/256 2.2429 -0.023 30-year bond 103-196/256 2.8125 -0.023

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 24.50 0.25

spread

U.S. 3-year dollar swap 20.75 0.75

spread

U.S. 5-year dollar swap 8.00 0.25

spread

U.S. 10-year dollar swap -3.25 0.25

spread

U.S. 30-year dollar swap -30.75 0.00

spread

(Reporting by Richard Leong; Editing by Meredith Mazzilli)