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TREASURIES-Bonds on track for best year since 2014

Karen Brettell

NEW YORK, Dec 31 (Reuters) - Longer-dated U.S. Treasuries are on track to post their best return since 2014 on Tuesday, after concerns about the slowing U.S. economy prompted the Federal Reserve to cut interest rates three times this year. Slowing growth that was worsened by the trade war between the United States and China, tepid inflation and concerns that the U.S. central bank went too far in raising rates last year prompted a radical shift in 2019 that at one point sent benchmark yields to their lowest levels since 2016. The closely watched yield curve between two-year and 10-year notes also inverted in August, a signal that a recession is likely in the next one to two years. It has since steepened out to its highest levels since October 2018. Longer-dated debt gained this year on concerns that low inflation and weak growth will persist or worsen. Demand for yields, with many bonds in Europe and Japan trading in negative territory, added to their outperformance. Thirty-year bonds are on track for a 17.15% return this year , according to Bank of America Merrill Lynch. Benchmark 10-year notes are heading toward a 9.03% return for the year. In 2014, 30-year bonds returned 29.43% and 10-year notes returned 10.72%. Optimism this month that the growth picture in the United States is improving, and an increase in risk appetite after the United States and China agreed to the first phase of a trade deal, however, has eaten into the years returns. Thirty-year bonds are on track for a 2.83% loss this month and 10-year notes are heading toward a 0.91% decrease. Overnight funding markets were stable on Tuesday, indicating that the Federal Reserve has offset any potential year-end funding squeeze.

December 31 Tuesday 9:36AM New York / 1436 GMT

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(Reporting by Karen Brettell; Editing by Nick Zieminski)