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TREASURIES-U.S. yield curve flattens as trade worries offset jobs data

Richard Leong

* U.S. payrolls grow 164,000 in July, slower than June

* Renewed U.S.-China trade tensions keep bond yields low

* Futures suggest traders see a U.S. rate cut in September

(New throughout, updates market action, comments, adds graphics) NEW YORK, Aug 2 (Reuters) - The spread between short- and long-dated U.S. Treasuries yields contracted on Friday as fears about the escalating trade war between Washington and Beijing offset reassuring data about the U.S. labor market. Trade worries roiled financial markets a day after U.S. President Donald Trump threatened new tariffs on Chinese goods in a bid to move Beijing toward a trade deal. The turmoil has also stoked expectations that the Federal Reserve would lower rates in September and possibly December. Investors have piled into Treasuries as a safe haven, pushing benchmark 10-year yields to their lowest levels since Nov. 9, 2016, the day after Trump was elected. The yield curve also flattened. At 1:08 p.m. EDT (1708 GMT), the spread between two-year and 10-year Treasury yields narrowed 1.3 basis points to 14.4 basis points after being as tight as 10.5 basis points during the session. The inverted gap between three-month bill rates and 10-year yields grew to 20 basis points from 19 basis points. The inversion between the two maturities, which began May 23, is seen as an omen of a recession. The Fed lowered rates on Wednesday for the first time since 2008 in a bid to counter risks from trade conflicts and sluggish U.S. inflation. "The market is going to lead the Fed to lower rates because of trade frictions. Domestic data are not going to do it," said Robert Tipp, chief investment strategist at PGIM Fixed Income in Newark, New Jersey. Wall Street's main indexes slumped on Friday to one-month lows a day after Trump's threat to impose 10% tariffs on $300 billion worth of Chinese imports, starting Sept. 1. The trade war has hit manufacturers around the world. U.S. factory growth slowed in July to its weakest level in nearly three years, but the U.S. labor market has been resilient. The Labor Department said nonfarm payrolls increased by 164,000 in July, fewer than a revised 193,000 gain the previous month but in line with economists' expectations. Average hourly earnings rose 0.3%, matching the June increase and beating the 0.2% gain analysts forecast. Yields on benchmark 10-year Treasury notes were 1.866%, down 2.60 basis points from late on Thursday. They fell to 1.832% earlier Friday, the lowest since November 2016. Interest rates futures implied traders see a 98% chance the Fed would lower rates at its Sept. 17-18 policy meeting, up from 85% late on Thursday, according to CME Group's FedWatch program. August 2 Friday 1:12PM New York / 1712 GMT Price

US T BONDS SEP9 158-11/32 21/3210YR TNotes SEP9 128-204/256 4/32Price Current NetYield % Change

(bps)

Three-month bills 2.0225 2.0663 -0.019Six-month bills 1.9575 2.0041 -0.042Two-year note 100-15/256 1.7198 -0.002Three-year note 100-54/256 1.6761 0.002Five-year note 100-98/256 1.6697 -0.006Seven-year note 100-200/256 1.7557 -0.01310-year note 104-136/256 1.8657 -0.02630-year bond 109-244/256 2.4049 -0.036YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 14.20 -1.3030-year vs 5-year yield 73.40 -2.40

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 2.25 -2.00

spread

U.S. 3-year dollar swap -1.50 -2.25

spread

U.S. 5-year dollar swap -3.50 -1.25

spread

U.S. 10-year dollar swap -8.50 0.00

spread

U.S. 30-year dollar swap -38.50 -0.25

spread

(Reporting by Richard Leong; Editing by Bernadette Baum, Dan Grebler and David Gregorio)