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TREASURIES-Worries about N.Korea, Germany stoke demand for U.S. bonds

* N. Korean foreign ministers escalate geopolitical concerns

* Fallout from German election spur safe-haven bids

* U.S. to sell $88 bln short- to medium-dated notes

* Fed's Dudley expects continued gradual U.S. rate increases

(Updates market action, adds quotes) NEW YORK, Sept 25 (Reuters) - U.S. Treasury yields fell on Monday as concerns about tensions between North Korea and the United States and a surge in support for the far right in Sunday's German election stoked safe-haven demand for U.S. government bonds. The benchmark 10-year yield posted its biggest single-day drop in over two weeks, holding within its recent range ahead of this week's $88 billion in short- and medium-term debt supply and a speech on Tuesday from Federal Reserve Chair Janet Yellen. On Monday, North Korean foreign minister Ri Yong Ho said U.S. President Donald Trump declared war on North Korea and that Pyongyang reserves the right to take countermeasures amid heated rhetoric between Trump and North Korean leader Kim Jong Un over the latter's nuclear weapons program. "It's another marker that this won't cool off," said Robert Tipp, chief market strategist at PGIM Fixed Income in Newark, New Jersey. U.S. bond yields initially fell in step with their German counterparts following a surprisingly weak election result for Germany's Angela Merkel. A surge in support for the far right stoked concerns about a more hardline stance towards the euro zone. "The German election led to an euro zone bond rally," said Eric Stein, co-director of global income group in Eaton Vance Management in Boston. The benchmark 10-year Treasury yield was down 4 basis points at 2.222 percent. Last Wednesday, the 10-year yield reached 2.289 percent, its highest since Aug. 8, after the Fed signaled it may raise interest rates at its Dec. 12-13 policy meeting. While geopolitical worries returned to the forefront on Monday, traders appeared more focused on this week's bond supply and what Yellen may hint about a possible December rate increase than on geopolitical concerns. The Treasury Department will sell $26 billion of two-year notes on Tuesday; $34 billion in five-year debt on Wednesday and $28 billion of seven-year notes on Thursday. On Tuesday, Yellen is scheduled to speak on "Prospects for Growth: Reassessing the Fundamentals" at 12:45 p.m. (1645 GMT). Earlier on Monday, New York Fed President William Dudley said the U.S. central bank is on track to gradually raise rates given factors depressing inflation are "fading" and the U.S. economy's fundamentals are sound. On the other hand, Chicago Fed President Charles Evans said the Fed should wait until there are clear signs of faster wage and price growth before hiking rates again. September 25 Monday 2:32PM New York / 1832 GMT Price

US T BONDS DEC7 154-28/32 0-25/32 10YR TNotes DEC7 126-20/256 0-88/256 Price Current Net Yield % Change

(bps)

Three-month bills 1.0075 1.024 -0.005 Six-month bills 1.1675 1.1905 0.006 Two-year note 99-170/256 1.4271 -0.016 Three-year note 99-120/256 1.5587 -0.029 Five-year note 99-2/256 1.8364 -0.035 Seven-year note 98-208/256 2.0597 -0.041 10-year note 100-64/256 2.2216 -0.040 30-year bond 99-188/256 2.763 -0.033

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 26.25 -0.25

spread

U.S. 3-year dollar swap 22.50 0.00

spread

U.S. 5-year dollar swap 8.25 -0.25

spread

U.S. 10-year dollar swap -3.75 -0.25

spread

U.S. 30-year dollar swap -31.75 -0.50

spread

(Reporting by Richard Leong; Editing by Meredith Mazzilli and Chizu Nomiyama)