May 28, 2014 / 2:05 PM / 3 years ago

TREASURIES-10-year yields tumble to 10-month low in line with Germany

* U.S. 30-year bond yields also fall, near two-week lows

* German Bund yields down on the day, weigh on Treasury yields

* Focus on supply later in the session

By Gertrude Chavez-Dreyfuss

NEW YORK, May 28 (Reuters) - Yields on U.S. 10-year Treasury notes dropped to their lowest in 10 months on Wednesday, in line with falls in the German bond market following soft data from the euro zone's largest economy.

German 10-year Bund yields, the benchmark for euro zone borrowing, were down on Wednesday at 1.351 percent. Yields fell after an unexpected increase in German unemployment and a deceleration in the euro zone money supply. The data reinforced expectations that the European Central Bank will introduce further stimulus at next month's meeting.

The rally in Bunds spilled over to U.S. Treasuries, which saw 10-year note yields tumble to their lowest since July. U.S. 30-year bond yields also fell, to near two-week lows.

"Mostly what's going on at the moment is being led by Germany and we're just reacting," said David Keeble, global head of interest rates strategy at Credit Agricole in New York. "There seems to be nothing U.S. about this rally in Treasuries."

One of the economic numbers that set off the rally in Bunds was the German unemployment data, which posted its strongest monthly rise in over five years in May to 2.905 million jobless on a seasonally-adjusted basis.

The data cemented expectations of more easing measures for the euro zone. ECB Executive Board member Yves Mersch said as much on Wednesday. He said an ECB meeting next week could yield a combination of policies to tackle low inflation and low credit growth, but the timing of the implementation could vary.

In mid-morning trading, prices on 30-year Treasury bonds were up 26/32 to yield 3.322, from 3.364 percent late Tuesday. U.S. 30-year yields hit a low of 3.311 percent, the lowest since May 15.

Benchmark 10-year U.S. Treasury notes were up 12/32 in price to yield 2.473 percent, from 2.518 percent on Tuesday. Yields touched a low of 2.466 percent, their weakest level since July 22 last year.

Supply is once again on the agenda on Wednesday, with $118 billion on the auction block, including the $35 billion in five-year notes, the reopening of the $13 billion in two-year floating rate notes, the $45 billion in 4-week bills, and $25 bln in 52-week bills. (Editing by Nick Zieminski)

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