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TREASURIES-Yields fall as trade war concerns offset Bullard comments

Karen Brettell

(Adds comments by Powell and Bullard, auction result, updates prices)

* Fed's Bullard sees no need for 50 bps cut in July

* U.S. official says U.S.-China trade war could last years

* Treasury sells $40 bln two-year notes to solid demand

NEW YORK, June 25 (Reuters) - U.S. benchmark Treasury yields fluctuated around the key 2% level on Tuesday as investors weighed the prospect of an ongoing U.S.-China trade war against the likelihood that the Federal Reserve may be less dovish than traders expect. St. Louis Federal Reserve Bank President James Bullard said on Tuesday he did not view a 50 basis point cut at the U.S. central bank's July meeting as warranted, rowing back expectations of how low rates may go in the near term. "I don't think the situation really calls for that, but I would be willing to go 25 (basis points)," he said. Bullard's comments came just before a speech by Fed Chairman Jerome Powell, who reiterated that the central bank still saw U.S. growth prospects as strong, with unemployment low and inflation near the Fed's 2% annual target. "Bullard's comments are the most telling because he is the most dovish member," said Mary Ann Hurley, vice president in fixed income trading at D.A. Davidson in Seattle. "The fact that he outright says that the conditions do not warrant it at this point, I think is very, very significant." Interest rate futures traders are now pricing in a 33% chance of a 50 basis point cut at the Fed's July meeting, down from 38% earlier on Tuesday, while a cut of at least 25 basis points is seen as certain, according to the CME Group's FedWatch Tool. Slowing global growth has sent yields to multi-year lows and prompted global central banks to adopt a more cautious tone on the economy.

Benchmark 10-year yields are holding just above

the 1.974% level reached on Thursday, which was the lowest since November 2016. Investors are next focused on whether U.S. President Donald Trump and Chinese President Xi Jinping can de-escalate the trade war between the two countries when they meet at the G20 summit in Japan. The goal of a meeting between the two leaders will be to restart trade talks and there is a pretty good chance that will happen, though these talks could go on for months or years, a senior administration official said on Tuesday. The Treasury Department sold $40 billion in two-year notes on Tuesday to solid demand, the first sale of $113 billion in coupon-bearing supply this week. The notes sold with an above-average bid-to-cover ratio of 2.58 times. The government will also sell $41 billion in five-year notes on Wednesday and $32 billion in seven-year notes on Thursday.

(Editing by Susan Thomas; Editing by Richard Chang)

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