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TREASURIES-U.S. yields sink on persistent U.S.-China trade issue, Brexit

Gertrude Chavez-Dreyfuss

(Adds Fed minutes, new comment, updated prices) NEW YORK, May 22 (Reuters) - U.S. Treasury yields fell on Wednesday, pressured by worsening trade tensions between the United States and China after a media report said the Trump government is considering limits to Chinese video surveillance firm Hikvision's ability to buy American technology. Investors were also spooked by developments in Britain's troubled attempt to exit the European Union, fueling declines in U.S. long-dated yields after hitting one-week highs the previous session. Even the Federal Reserve's minutes of its last monetary policy failed to take the spotlight from the U.S.-China trade conflict and Brexit. As expected, the Fed minutes released on Wednesday showed no surprises. Over the last few days, the U.S.-China trade saga has been front and center of bond investors' radar. The New York Times reported late Tuesday that the U.S. Commerce Department may require that U.S. companies obtain government approval to supply components to Hikvision, limiting the company's access to technology that helps power its equipment. That came after Washington on Tuesday temporarily eased curbs against Chinese telecommunications equipment maker Huawei

Technologies .

Overall, analysts believe the United States has the upper hand in its trade war with the world's second largest economy. "Some have suggested that China will deliberately deplete its holdings of Treasuries in order to hit back at the U.S. if it ratchets up their trade war," said John Higgins, chief markets economist at Capital Economics "Even if this happened though, we suspect that the temporary downside for Treasuries would ultimately be trumped by the upside from an escalation of their dispute," he added. Aside from China, UK worries continued to help boost U.S. bond prices, after Prime Minister Theresa May's final ploy to win support for her Brexit plan failed to win over either opposition lawmakers or many in her own party. May further resisted growing calls to resign on Wednesday, vowing to press on despite mounting opposition from lawmakers and even some of her own ministers to her latest Brexit gambit.

In afternoon trading, U.S. 10-year note yields fell to 2.39% from 2.426% late on Tuesday. Yields on U.S. 30-year bonds slid to 2.815% from 2.842% on Tuesday. On the short end of the curve, U.S. 2-year yields were down at 2.228% from Tuesday's 2.258%. The Fed minutes released Wednesday afternoon failed to generate excitement for investors, although one analyst said the comments were on the hawkish side. Eric Stein, co-director of global income group at Eaton Vance Management in Boston said the re-escalation in the trade tension between U.S. and China could change the Fed's outlook. "On the other hand, for those looking for a rate cut, they would be disappointed because they signaled they are on hold until things change. If the trade war doesnt get worse, U.S. yields should eventually go back up."

Wednesday, May 22 at 1457 EDT (1857 GMT):

Price Current NetYield % Change

(bps)

Three-month bills 2.325 2.3712 -0.022Six-month bills 2.34 2.4075 -0.010Two-year note 100-9/256 2.231 -0.027Three-year note 99-222/256 2.1712 -0.030Five-year note 100-70/256 2.1911 -0.037Seven-year note 100-148/256 2.2843 -0.03910-year note 99-212/256 2.3944 -0.03230-year bond 101-36/256 2.8184 -0.024

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 5.50 0.25

spread

U.S. 3-year dollar swap 4.25 0.50

spread

U.S. 5-year dollar swap 1.00 0.50

spread

U.S. 10-year dollar swap -4.75 0.25

spread

U.S. 30-year dollar swap -28.00 0.00

spread

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Richard Leong: Editing by Susan Thomas and Chizu Nomiyama)