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TREASURIES-U.S. yield inversion deepens, touches off recession fears

Richard Leong

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

* Wall Street's gains evaporate on recession worries

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

(Updates market action, adds new graphic) 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. "The level of stress and volatility is persisting. The market is not convinced it has found its footing," said Bruno Braizinha, U.S. rates strategist at Bank of America Merrill Lynch. The Treasury Department sold its latest two-year, fixed-rate note supply at a yield of 1.516%, which was the lowest yield at an auction of this maturity since September 2017. . On the open market, 10-year Treasury yields were 1.485%, down 5.90 basis points on the day. They reached a three-year low of 1.443% on Monday. The yields on two-year notes were 1.529%, down 2.30 basis points. On Monday, they declined to 1.449%, their lowest since September 2017. The spread on three-year T-bill rates over 10-year yields grew to 52 basis points, a level not seen since March 2007, according to Refinitiv data. The unrelenting rally in bonds has stemmed from investors' nervousness about a recession and uncertainties over the trade conflict between China and the United States. U.S. President Donald Trump on Monday said he expected a trade deal with China after positive gestures by Beijing.

China's foreign ministry said on Tuesday that it had not heard of any recent telephone call between the United States and China on trade. A closely followed J.P. Morgan survey suggested blistering demand for Treasuries has cooled a bit 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 1:43PM New York / 1743 GMT Price

US T BONDS SEP9 166-20/32 49/3210YR TNotes SEP9 131-44/256 13/32Price Current NetYield % Change

(bps)

Three-month bills 1.9575 2.0002 0.002Six-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 101-180/256 1.3909 -0.039Seven-year note 102-212/256 1.4442 -0.04510-year note 101-76/256 1.4845 -0.05930-year bond 106-140/256 1.9601 -0.080YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield -4.80 -4.3030-year vs 5-year yield 56.80 -4.95

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

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

spread

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

spread

U.S. 5-year dollar swap -6.25 -0.75

spread

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

spread

U.S. 30-year dollar swap -40.00 -0.75

spread

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