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TREASURIES-U.S. yields fall on growth jitters, U.K. bond rally

Richard Leong

* BOE's Carney remarks send UK yields to 2-1/2-year lows Investors most upbeat on Treasuries since late May -survey

(Updates to late U.S. market action, adds quote) NEW YORK, July 2 (Reuters) - U.S. Treasury prices rose on Tuesday, driving 10-year yields below 2%, on renewed safe-haven demand due to anxiety about slowing global economic growth and reduced optimism about the restart on U.S.-China trade talks. U.S. yields were also pressured by a drop in British yields to 2-1/2-year lows after remarks by Bank of England Governor Mark Carney on the risks from Brexit and trade conflicts prompted speculation the BOE may lower interest rates in the next 12 months. At the G20 summit in Japan last weekend, Washington and Beijing agreed to restart trade talks after U.S. President Donald Trump offered concessions, including no new tariffs and an easing of restrictions on tech company Huawei, while China approved making unspecified new purchases of U.S. farm products.

Even so, traders and investors remain cautious about a trade deal between the world's two biggest economies due to the lack of details about the resumption of talks. "We're headed in a very good direction," White House trade adviser Peter Navarro said in an interview with CNBC television. "It's complicated, as the president said, correctly, this will take time and we want to get it right. So let's get it right."

Traders and investors have now shifted their focus to a spate of weaker-than-expected manufacturing data around the world, which may push the U.S. Federal Reserve and other major central banks to consider easing monetary policies, analysts said. "In general, the initial reactions post-G20 has faded a bit," said Jonathan Cohn, interest rate strategist at Credit Suisse. "We are seeing weakness in global PMIs." The softening in manufacturing activity around the world stemmed largely from the trade conflict between the United States and its trading partners. The cloudy economy outlook has underpinned the appeal of low-risk U.S. government bonds. Bond investors were the most bullish about owning U.S. longer-dated government debt since May 28, a JPMorgan survey showed on Tuesday. In late U.S. trading, benchmark 10-year U.S. Treasury note yields were down 5.70 basis points at 1.976%. They retested the 1.974% reached on June 20, which was their lowest level since November 2016. The drop in U.S. yields accelerated with the rally in U.K. gilts in response to the comments by Carney, who suggested the U.K. economy may need more help to deal with a downturn. British 10-year yields shed 13 basis points to 0.724%, the lowest level since October 2016. "The BOE is one of the last major central banks throwing in the towel that it has to ease," said Wen Lu, U.S. rates strategist at TD Securities. The derivatives market implied traders see an even chance the BOE will lower rates at year-end, while U.S. rates futures signaled that traders fully expect the Fed to lower borrowing costs by at least a quarter point at its next policy meeting, at the end of July. The U.S. bond market will close early, at 2 p.m. EDT (1800 GMT), on Wednesday, ahead of the U.S. July Fourth holiday on Thursday. Tuesday, July 2, at 1450 EDT (1850 GMT): Price

US T BONDS SEP9 156-4/32 1-4/3210YR TNotes SEP9 128-36/256 0-116/256Price Current NetYield % Change

(bps)

Three-month bills 2.1575 2.2056 0.006Six-month bills 2.03 2.0796 -0.015Two-year note 99-186/256 1.7653 -0.022Three-year note 100-28/256 1.7117 -0.032Five-year note 100-4/256 1.7467 -0.049Seven-year note 100-44/256 1.8487 -0.05510-year note 103-144/256 1.9757 -0.05730-year bond 107-184/256 2.5063 -0.051

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 4.00 -1.50

spread

U.S. 3-year dollar swap 2.50 -1.00

spread

U.S. 5-year dollar swap -1.00 -0.75

spread

U.S. 10-year dollar swap -4.50 -0.25

spread

U.S. 30-year dollar swap -32.00 -0.25

spread

(Reporting by Richard Leong; Editing by Richard Chang and Leslie Adler)