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TREASURIES-Yields buoyed by U.S.-Mexico trade optimism

Kate Duguid

(Adds analyst quote, updates yields, adds rate cut developments)

NEW YORK, June 10 (Reuters) - U.S. government bond yields rose on Monday, as risk appetite was lifted by the U.S.-Mexico trade and migration deal signed on Friday, tempering expectations of interest rate cuts in 2019.

U.S. President Donald Trump had threatened tariffs on Mexican goods unless Mexico stopped the flow of undocumented immigrants across the two countries' border. On Friday, the tariffs were called off after an agreement was reached.

"Trump's walking back of potential tariffs on Mexican imports has offered a reprieve, not reversal, of the recent bullish price action in Treasuries," wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

The resolution of the Mexico trade dispute did not fundamentally alter the chances of a deal with China, Lyngen said. The market brushed off Trump's comments on Monday that he was ready to impose another round of tariffs on Chinese imports if he does not reach a deal with China's president at a Group of 20 summit later this month, however.

The benchmark 10-year yield rose 6.3 basis points to 2.145%; the seven-year yield was also 6.3 basis points higher to 2.031%. At the long end, the 30-year yield was up 5.3 basis points to 2.624%. That steepened the yield curve, measured as the spread between the two- and 10-year yields, to 24.3 basis points.

Also bolstering risk sentiment was a drop in interest rate cut expectations for 2019.

On Friday, the 10-year yield hit its lowest since September 2017 as domestic employers hired far fewer workers than expected in May. Weak employment data last week, alongside dovish comments from Fed Chair Jerome Powell, significantly raised expectations of rate cuts in 2019.

Trading off the U.S.-Mexico deal resolution, two-year yields , which reflect market expectations of rate cuts, rose 5.1 basis points to 1.900%. Using CME Group's FedWatch tool, expectations for a rate cut at the Fed's June meeting fell to 19.2% Monday from 25% on Friday and from 66.3% to 65% for the July.

That sentiment was echoed in a note from a Goldman Sachs economist on Monday.

"Although it is a close call, we still expect the (Federal Open Markets Committee) to keep the funds rate unchanged in the remainder of the year," economist Jan Hatzius wrote. Powell's promise to act "as appropriate" was not meant to signal a rate cut, he said, but was merely meant to show the U.S. central bank was not tone deaf to rising trade tensions. (Reporting by Kate Duguid; Editing by Dan Grebler and Sonya Hepinstall)