TREASURIES-Yields fall as optimism on US-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 to sell $32 bln seven-year notes

NEW YORK, June 27 (Reuters) - U.S. Treasury yields fell on Thursday on concerns that trade discussions between the U.S. 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 (SCMP) 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 gave back gains, however, on concerns that China will require the U.S. to remove sanctions on Chinese telecoms equipment maker Huawei. Sanctions on the company should be removed immediately, a Chinese commerce ministry spokesman said on Thursday. U.S. President Donald Trump said on Wednesday that a trade deal with Chinese President Xi Jinping was possible this weekend but he is prepared to impose U.S. tariffs on virtually all remaining Chinese imports if the two countries continue to disagree. 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. Trump and 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. 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. The U.S. Federal Reserve is seen as certain to cut 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 will sell $32 billion in seven-year notes on Thursday, 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 and $40 billion in two-year notes on Tuesday to solid demand.

(Editing by Chizu Nomiyama)