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TREASURIES-Yields lower on heightened trade tensions

Kate Duguid

NEW YORK, May 17 (Reuters) - Trade tension between the United States and China ratcheted up again on Friday, pushing Treasury yields lower as traders sought safety in high-quality assets.

The United States must show sincerity if it is to hold meaningful trade talks, China said on Friday, after U.S. President Donald Trump dramatically raised the stakes with a potentially devastating blow to Chinese tech giant Huawei.

China has yet to say whether or how it will retaliate against the latest escalation in trade tension, although state media has taken an increasingly strident tone, with the ruling Communist Party's People's Daily publishing a front-page commentary that evoked the patriotic spirit of past wars.

"There has been a generalized risk-off move on the back of the headlines earlier from China that said they were not particularly interested in restarting negotiations on trade," said Jonathan Cohn, head of rates trading strategy at Credit Suisse.

Yields across maturities were lower, with the biggest moves at the long end of the yield curve. The 10-year yield was last down 1.1 basis points to 2.394%, with the 30-year yield last down 1.5 basis points at 2.825%.

Risk assets were hit by increasingly acrimonious trade dispute, with the S&P 500 index down 0.29% in morning trade, the Dow Jones Industrial Average down 0.2% and the tech-heavy Nasdaq Composite down 0.45%.

"If the current backdrop holds - this stalemate between the U.S. and China - I think focus will turn to the G20 meeting in June. That's the next most important trade-related event," said Cohn.

Treasury prices also benefited from the collapse in Britain's Brexit talks. U.S. yields moved in sympathy with British government bond yields, which fell to their lowest level in six weeks on Friday as Prime Minister Theresa May's weakening grip on power revived fears of a no-deal Brexit and prompted investors to buy low-risk government bonds.

"The fact that it seems very unlikely the UK parliament will pass a Brexit deal now that Labour and UK government talks seem to have broken down, that may have also been an amplifying factor given the outperformance of Gilts," said Cohn. (Reporting by Kate Duguid; editing by Jonathan Oatis)