TREASURIES OUTLOOK-Yields fall as optimism on U.S.-China trade deal ebbs

Karen Brettell

* Concerns grow that U.S.-China trade deal will be complicated

* Quarter-end rebalancing seen helping bond demand

* Treasury sell $32 bln seven-year notes to solid demand

NEW YORK, June 27 (Reuters) - U.S. Treasury yields fell on Thursday on concerns that trade discussions between the United States and China on Saturday may be more complicated than previously expected, boosting demand for safe-haven debt. Yields rose overnight after the South China Morning Post said Washington and Beijing were laying out an agreement that would help avert the next round of tariffs on an additional $300 billion of Chinese imports. They later reversed, however, on concerns that China will require the United States to remove sanctions on Chinese telecoms equipment maker Huawei in order to make a trade deal. Sanctions on the company should be removed immediately, a Chinese commerce ministry spokesman said on Thursday.

News headlines suggest that the meeting in Osaka is going to be a lot more tense than some of the initial optimism suggested, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. U.S. President Donald Trump and Chinese President Xi Jinping will meet for the first time in seven months to discuss deteriorating ties between the world's two largest economies at the G20 summit in Japan. Trump said on Wednesday that a trade deal with Xi was possible this weekend but he is prepared to impose tariffs on virtually all remaining Chinese imports if the two countries continue to disagree. Yields fell to session lows on Thursday after White House economic adviser Larry Kudlow said that Washington may move ahead with additional tariffs on Chinese products. A senior Trump administration official also said it was unlikely that the United States would agree to lift restrictions on Huawei. The ongoing U.S.-China trade war is being blamed for slowing international economic growth and adding pressure on central banks to adopt looser monetary policies. The Federal Reserve is seen as certain to cut benchmark U.S. interest rates when it meets in July. Demand for bonds from investors rebalancing accounts for quarter-end is also expected this week. The Treasury Department sold $32 billion in seven-year notes on Thursday to solid demand, the final sale of $113 billion in coupon-bearing supply this week. The government sold $41 billion in five-year notes on Wednesday to slightly soft demand while a $40 billion two-year note sale on Tuesday was firm.

(Editing by Chizu Nomiyama and James Dalgleish)