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TREASURIES-North Korea worries send U.S. bond yields lower

* Oct T-bill yields elevated on debt ceiling concerns

* Companies seen selling $35 bln-$40 bln in high-grade debt -IFR

* Fed should be cautious as inflation stays weak -Fed's Brainard

NEW YORK, Sept 5 (Reuters) - U.S. Treasury yields fell on Tuesday as worries about further nuclear tests from North Korea that stoked tensions with United States and its allies spurred safe-haven demand for U.S. government debt. Yields on Treasury bills due in October remained elevated as investors await developments on whether U.S. lawmakers would reach a deal to increase the debt ceiling in a bid to avert a default. "Right now the safe-haven bid is clearly in place as North Korea did a 'H-bomb' test over the weekend," Larry Milstein, head of government and agency trading at R.W. Pressprich & Co in New York. On Sunday, North Korea said it tested an advanced hydrogen bomb for a long-range missile, prompting global condemnation and a U.S. warning of a "massive" military response if it or its allies were threatened. Traders and analysts said the decline in U.S. yields was partly offset by hedging activity tied to an expected $35 billion to $40 billion worth of investment-grade corporate bond supply to hit this week according to IFR, a Thomson Reuters unit. Meanwhile, Federal Reserve Governor Lael Brainard said the U.S. central bank should be cautious about raising key overnight borrowing costs further as inflation has been stuck below its 2 percent goal. On the other hand, Brainard suggested she was prepared to back the announcement of the Fed's plan to announce a reduction of its $4.2 trillion bond holdings at its upcoming Sept. 19-20 meeting. At 10:10 a.m. (1410 GMT), the yield on benchmark 10-year Treasury notes was down 5 basis points at 2.105 percent, while the 30-year bond yield was more than 4 basis points lower at 2.722 percent. The yield on T-bills due on Oct. 5, the first debt issue that the government might skip repaying if the debt ceiling is not raised before a late September deadline, was at 1.200 percent, down 4 basis points from late on Friday. U.S. financial markets were closed on Monday for the Labor Day holiday. September 5 Tuesday 10:12AM New York / 1412 GMT Price

US T BONDS DEC7 156-12/32 1-6/32 10YR TNotes DEC7 127-36/256 0-120/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 0.9825 0.9985 -0.013 Six-month bills 1.0725 1.0931 -0.003 Two-year note 99-226/256 1.31 -0.036 Three-year note 100-62/256 1.4155 -0.043 Five-year note 99-188/256 1.6808 -0.052 Seven-year note 99-164/256 1.9302 -0.056 10-year note 101-80/256 2.1029 -0.054 30-year bond 100-152/256 2.7208 -0.047

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 21.75 1.25

spread

U.S. 3-year dollar swap 18.75 0.75

spread

U.S. 5-year dollar swap 6.00 0.25

spread

U.S. 10-year dollar swap -5.50 -0.25

spread

U.S. 30-year dollar swap -35.00 -0.25

spread

(Reporting by Richard Leong; Editing by Meredith Mazzilli)