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TREASURIES-U.S. yields fall on worries about U.S.-China trade talks

Richard Leong

* U.S. sells $19 bln in 30-year bonds to mediocre demand

* Trump touts deal within sight, China denies backtracking

* U.S. 3-month, 10-year yield curve briefly inverts

(Updates market action, adds quote, graphic) NEW YORK, May 9 (Reuters) - U.S. Treasury yields fell on Thursday, with longer-dated yields hitting five-week lows, as China and the United States were set to resume tense trade talks just hours ahead of the Trump administration's plan to raise tariffs on Chinese imports. The safe-haven demand for Treasuries offset selling activity tied to traders' making room for $84 billion of debt related to this week's quarterly refunding, which is expected to raise $28.6 billion in cash for the federal government. Beijing and Washington had seemed close to a trade agreement until last weekend, when President Donald Trump announced his intention to hike tariffs on $200 billion of Chinese goods to 25% from 10% beginning on Friday. His negotiators said China was backtracking on earlier commitments. A Chinese delegation led by Vice Premier Liu He arrived in Washington to salvage a deal, calling for the United States to meet China halfway. Investors worry that the world's two biggest economies may not reach an agreement by Friday, leading to a continuing trade war that would slow global growth and business activity and hurt corporate profits. "I don't think we are going to get an all-clear sign on Friday," said Blake Gwinn, head of front-end rates strategy at NatWest Markets in Stamford, Connecticut. "This could keep rolling along for weeks or months." In afternoon U.S. trading, the yields on benchmark 10-year Treasury notes were down 2.6 basis points at 2.457% after hitting a five-week low at 2.422% Ten-year yields briefly fell below three-month bill rates for the first time since March when an inversion had stoked talk of a U.S. recession. Thursday's $19 billion 30-year bond auction, the final leg of the refunding, fetched mediocre demand, albeit stronger than the $27 billion 10-year note sale a day earlier. After the dismal 10-year auction, there was some speculation China might be paring its bidding for this week's Treasury supply in response to Trump's threat on tariffs, but most analysts concluded the reduced demand stemmed from general jitters over U.S.-China trade tensions. China is the biggest foreign holder of Treasuries, at $1.131 trillion in February. "Uncertainties over the China tariff issues, the potential for rising inflation if levies are hiked to 25%, and this week's price swings may have unnerved investors, leaving the paper mostly in dealer hands," Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco, wrote in a research note. Looking ahead, traders await government data on the Consumer Price Index due at 8:30 a.m. (1230 GMT) Friday; analysts forecast a mild 0.2% pickup in April. Thursday, May 9, at 1447 EDT (1847 GMT): Price

US T BONDS JUN9 148-19/32 12/3210YR TNotes JUN9 123-248/256 7/32Price Current NetYield % Change

(bps)

Three-month bills 2.38 2.4275 -0.007Six-month bills 2.38 2.4423 -0.007Two-year note 99-247/256 2.2682 -0.027Three-year note 99-180/256 2.2279 -0.030Five-year note 99-250/256 2.2549 -0.028Seven-year note 100-40/256 2.3505 -0.03010-year note 99-64/256 2.4601 -0.02330-year bond 102-96/256 2.8805 -0.010YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 19.00 0.5530-year vs 5-year yield 62.50 1.75

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 9.50 -0.50

spread

U.S. 3-year dollar swap 7.00 -0.25

spread

U.S. 5-year dollar swap 3.50 0.00

spread

U.S. 10-year dollar swap -2.25 0.00

spread

U.S. 30-year dollar swap -26.00 -1.00

spread

(Reporting by Richard Leong Editing by Bernadette Baum and Leslie Adler)