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TREASURIES-U.S. yields rise on trade deal hopes, more modest rate cut expectations

Karen Brettell

expectations@ (Adds auction results, quote, updates prices)

* Trade deal hopes reduce safe-haven demand for bonds

* U.S. durable goods orders fall in May

* Treasury sells $41 bln five-year notes to soft demand

NEW YORK, June 26 (Reuters) - U.S. Treasury yields rose on Wednesday on hopes that the United States and China will make progress in trade talks later this week and as traders reduced bets that the Federal Reserve will cuts rates twice when it meets next month. Prices fell, lifting yields, after U.S. Treasury Secretary Steven Mnuchin was quoted by CNBC as saying the trade deal between the United States and China is "about 90%" complete.

Mnuchins comments were later restated to show he was using the past tense to describe progress in the U.S.-China talks.

U.S. President Donald Trump said he would impose additional tariffs on China if he did not reach a trade deal with Chinese leader Xi Jinping, but left open the possibility that the two leaders could make a deal to avert further tariffs at the G20 summit in Japan. The ongoing U.S.-China trade war is being blamed for slowing international growth and adding more pressure on central banks to adopt looser policies. Yields have also risen since St. Louis Federal Reserve Bank President James Bullard said on Tuesday that he does not view two rate cuts as warranted at the U.S. central banks July meeting, rowing back expectations of how low rates may go in the near term. Interest rate futures traders are now pricing in a 26-percent chance of a 50 basis point cut in July, down from 38 percent before Bullards comments, according to the CME groups FedWatch tool. A cut of at least 25 basis points is seen as certain. Fed Chairman Jerome Powell also on Tuesday defended the central bank's independence from Trump and financial markets, both of which seem to be pushing for aggressive rate cuts.

Fed speakers yesterday seems to confirm the possibility of one rate cut at the July meeting, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. Bond prices briefly pared losses after data showed U.S. durable goods fell 1.3 percent in May, adding to concerns about the slowing economy. The Treasury Department sold $41 billion in five-year notes on Wednesday to slightly soft demand, the second sale of $113 billion in coupon-bearing supply this week. The government saw solid demand for a $40 billion sale of two-year notes on Tuesday. It will also sell $32 billion in seven-year notes on Thursday.

(Editing by Nick Zieminski )

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