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TREASURIES-U.S. yield inversion deepens, stokes recession fears

Richard Leong

* U.S. 2-year note sold at lowest yield in almost 2 years

* U.S. to sell $41 bln 5-year notes, $18 bln FRN on Wednesday

* Wall Street's gains evaporate on recession worries

* Investors turn more cautious on longer-dated bonds -J.P. Morgan

(Updates market action, adds quote) NEW YORK, Aug 27 (Reuters) - The U.S. yield curve inversion deepened on Tuesday to levels not seen since 2007, rekindling fears of a looming recession that spurred a sell-off on Wall Street and stoked even more safe-haven demand for government bonds. The intense interest in Treasuries supported demand for $40 billion worth of two-year government debt for sale, part of this week's $113 billion fixed-rate Treasury supply. The yield curve often inverts prior to a U.S. recession. "As the curve inverts further, it has inspired more long-end buying," said Mike Lorizio, head of Treasuries trading at Manulife Asset Management in Boston. The Treasury Department sold its latest two-year, fixed-rate note supply at a yield of 1.516%, which was the lowest at an auction of this maturity since September 2017. . The Treasury will sell $41 billion of five-year notes on Wednesday, followed by a $32 billion auction of seven-year debt on Thursday. It will also offer $18 billion in floating-rate notes on Wednesday. On the open market, 10-year Treasury yields were 1.488%, down 5.60 basis points on the day. They reached a three-year low of 1.443% on Monday. The yields on two-year notes were 1.531%, down 2.00 basis points. On Monday, they declined to 1.449%, the lowest since September 2017. The three major Wall Street indexes were lower, wiping out their initial increase. The spread on three-year T-bill rates over 10-year yields grew as wide as 52 basis points, a level not seen since March 2007, according to Refinitiv data. The deepening curve inversion reflects investors' nervousness about a recession and uncertainties over the trade conflict between China and the United States. "It's not a sign of confidence in inflation or a pickup in growth," Lorizio said. U.S. President Donald Trump on Monday said he expected a trade deal with China after positive gestures by Beijing following a global stock market rout last week. China's Foreign Ministry said on Tuesday it had not heard of any recent telephone call between the United States and China on trade. This raised doubts whether the world's two biggest economies can reach a trade deal in the foreseeable future.

A closely followed J.P. Morgan survey suggested blistering demand for Treasuries has tapered a tad as the share of investors who said they were neutral on longer-dated U.S. government debt grew to 54% on Monday, up from 49% a week ago. On the data front, U.S. consumer confidence weakened a bit in August even though consumers' optimism on their present situation hit its strongest level since late 2000, the Conference Board said. August 27 Tuesday 2:53PM New York / 1853 GMT Price

US T BONDS SEP9 166-18/32 47/3210YR TNotes SEP9 131-36/256 12/32Price Current NetYield % Change


Three-month bills 1.9525 1.9951 -0.003Six-month bills 1.845 1.8883 -0.005Two-year note 100-106/256 1.5305 -0.020Three-year note 100-42/256 1.4432 -0.030Five-year note 101-178/256 1.3925 -0.037Seven-year note 102-208/256 1.4466 -0.04210-year note 101-68/256 1.4879 -0.05630-year bond 106-124/256 1.9627 -0.077YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield -4.50 -3.9530-year vs 5-year yield 57.00 -4.80


Last (bps) Net

Change (bps)

U.S. 2-year dollar swap -2.25 -1.00


U.S. 3-year dollar swap -4.50 -0.75


U.S. 5-year dollar swap -6.00 -0.50


U.S. 10-year dollar swap -9.25 -0.50


U.S. 30-year dollar swap -39.50 -0.25


(Reporting by Richard Leong Editing by Paul Simao, Steve Orlofsky and Tom Brown)