* European yields fall as euro hits near two-year peak vs dollar
* Wall Street's decline stoke safe-haven bids for bonds
* U.S. one-month rate volatility at record low -BAML data
* October T-bill rates jump on worries about debt ceiling
(Updates market action, adds quote) NEW YORK, July 21 (Reuters) - U.S. Treasury yields fell on Friday, with benchmark yields hitting three-week lows, as the euro reached a near two-year high against dollar, raising doubts whether the European Central Bank would scale back its bond purchases later in 2017. Wall Street stock indexes retreated from record peaks following weak results from General Electric Co, kindling safe-haven demand for low-risk government debt. Trading volume was light in the absence of major U.S. economic data and some caution before next week's Federal Reserve policy meeting. 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 traders perceived ECB President Mario Draghi's comments at his news conference as supportive to build bullish bets on the euro . The euro 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. The benchmark 10-year Treasury yield was down more than 3 basis points at 2.230 percent after hitting a three-week low of 2.225 percent. The Dow Jones industrial average and S&P 500 were down 0.2 percent and 0.1 percent, respectively. Among Treasury bills, interest rates on T-bills due in October rose to their highest since October 2008 on risk of a default if Congress fails to raise the country's debt limit.
The Fed is widely expected to leave key interest rates unchanged in the wake of a softening in domestic inflation.
"You have four CPI (consumer price index) prints which were not very good. Why are we concerned about inflation?" said Jim Caron, portfolio manager at Morgan Stanley Investment Management in New York. Caron and some analysts expect inflation to rebound in the second half of 2017 on positive year-over-year comparisons and a further tightening in the labor market. An expected pause in the Fed holding U.S. rates has partly led to a decline in 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.
Friday, July 21 at 1447 EDT (1847 GMT): Price
US T BONDS SEP7 154-26/32 0-24/32 10YR TNotes SEP7 126-80/256 0-64/256 Price Current Net Yield Change (pct) (bps) Three-month bills 1.1475 1.1667 0.023 Six-month bills 1.09 1.1111 -0.005 Two-year note 99-210/256 1.3443 -0.016 Three-year note 100-4/256 1.4946 -0.018 Five-year note 99-196/256 1.7998 -0.023 Seven-year note 99-176/256 2.0485 -0.030 10-year note 101-64/256 2.2322 -0.034 30-year bond 104 2.8011 -0.035
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 24.50 0.25
U.S. 3-year dollar swap 20.50 0.50
U.S. 5-year dollar swap 7.75 0.00
U.S. 10-year dollar swap -3.50 0.00
U.S. 30-year dollar swap -31.00 -0.25
(Reporting by Richard Leong; Editing by Meredith Mazzilli and Richard Chang)