Wires

TREASURIES-U.S. yields fall, in line with Europe, as risk appetite worsens

Gertrude Chavez-Dreyfuss

(Adds new comment, Treasury supply, updates prices)

* U.S. 30-year, 10-year, 2-year yields fall to 2-week lows

* Treasury supply heavy this week

* Weak euro zone data pushes German yields to lowest since Sept 12

* U.S. manufacturing data higher than consensus, August level

NEW YORK, Sept 23 (Reuters) - U.S. Treasury yields dropped on Monday, in line with the European bond market, as risk appetite ebbed after softer-than-expected euro zone business activity data fueled recession fears in the region. U.S. 30-year, 10-year and 2-year yields all fell to two-week lows. Treasury supply is also heavy this week, but diminished risk appetite prevented investors from selling Treasuries to push yields higher, so they can buy the new issues at a lower price, analysts said. The Treasury department will sell $113 billion in shorter-dated notes: $40 billion in two-year notes on Tuesday, $41 billion in five-year notes on Wednesday, and $32 billion in seven-year notes on Thursday. There's also $18 billion in two-year floating rate notes on Wednesday. U.S. yields started their descent after a survey showed German private sector activity contracted for the first time in 6-1/2 years in September. French business activity also slowed unexpectedly and Markit's euro zone composite flash PMI fell to 50.4 in September from 51.9 in August. The weak data pushed Germany's benchmark 10-year bond yield to -0.59%, its lowest since the Sept. 12 European Central Bank meeting that concluded with rate cuts and fresh asset purchases to boost weak growth. In the United States, the IHS Markit manufacturing index for September was 51, slightly better than the consensus forecast and the August number. "The mix of (U.S.) data is much better than those out of Germany and the euro zone in general and reflects an economy still in expansion with low inflation, which will keep the October Federal Reserve policy decision on the fence for now," Action Economics said in its blog after the release of the numbers. In afternoon trading, U.S. benchmark 10-year note yields fell to 1.714% from 1.753% late on Friday, after hitting a two-week low of 1.677%. Yields on 30-year bonds were also lower, at 2.161% from 2.198% on Friday, touching a two-week trough of 2.12%. U.S. 2-year yields were down at 1.672% from Friday's 1.712%, after earlier falling to a two-week low of 1.64%. Neil Shearing, group chief economist at Capital Economics, said extremely low, or negative yields, have potentially huge consequences for financial markets. He noted that low long-term interest rates and flat yield curves could weigh on banks' profitability and affect pension funds' and insurers' ability to meet their obligations. "And while there is not much sign that low rates are fueling asset price bubbles now, the risk that they lead to a misallocation of resources and or inflate asset bubbles will increase the longer they stay at rock-bottom levels."

September 23 Monday 3:13 PM New York / 1913 GMT

Price Current NetYield % Change

(bps)

Three-month bills 1.865 1.9046 -0.005Six-month bills 1.87 1.9188 0.003Two-year note 99-171/256 1.675 -0.037Three-year note 99-176/256 1.6079 -0.040Five-year note 98-102/256 1.5887 -0.045Seven-year note 98-44/256 1.6551 -0.04510-year note 99-48/256 1.7146 -0.03830-year bond 101-232/256 2.163 -0.035

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap -1.00 -0.50

spread

U.S. 3-year dollar swap -3.00 -0.50

spread

U.S. 5-year dollar swap -5.75 0.25

spread

U.S. 10-year dollar swap -12.00 -0.25

spread

U.S. 30-year dollar swap -42.50 -0.50

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler and Andrea Ricci)