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TREASURIES-Yields at 20-month lows after Trump says will impose Mexican tariffs

Karen Brettell


* Trump to impose 5% tariffs on Mexican goods

* Chinese factory activity slowed in May

* US consumer prices rose in April

NEW YORK, May 31 (Reuters) - Benchmark U.S. Treasury yields tumbled to 20-month lows on Friday after U.S. President Donald Trump said the United States will impose a tariff on Mexican goods, sparking broad risk aversion. Trump said on Thursday there will be a 5% tariff on all goods coming from Mexico starting on June 10 until illegal immigration across the southern border is stopped. Mexican President Andres Manuel Lopez Obrador said that he would respond to the tariff threats with great prudence and that Foreign Minister Marcelo Ebrard would be in Washington tasked with convincing the U.S. government that Trump's measures were in neither country's interest. Its more of the same, with a new set of tariffs on Mexico thats driving risk sentiment in the U.S. Thats probably whats behind the flight to quality were seeing today, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. Yields have dropped this week as concerns build that the escalating trade war between the U.S. and China will harm international economic growth. The ramifications to global growth could be significant, Rajappa said. Data from China on Friday added to these fears, with factory activity shrinking more than expected in May. U.S. data showed that consumer prices rose in April though price pressures remained tepid.

Benchmark 10-year yields dropped as low as 2.147

percent, the lowest since September 2017, before rising back to 2.173 percent. The inversion between three-month bills and 10-year notes expanded as far as 24 basis points, a signal that a recession is likely to follow in one to two years. Fed Board of Governors Vice Chair Richard Clarida on Thursday touted the strength of the U.S. economy but also noted that policymakers are ready to adjust policy if there are signs of a persistent shortfall in inflation or if other developments show risks to the economy. Interest rate futures traders are now pricing in a 40% chance of a rate cut at the Feds July meeting, up from 18% a week ago, according to the CME Groups FedWatch Tool. A cut by December is seen as 90% likely.

(Editing by Susan Thomas)