TREASURIES-Yields drop as U.S.-China trade tension mounts

    * Trump threatens additional tariffs on Chinese goods
    * U.S. housing starts surge in May
    * U.S. 5-year and 30-year yield curve steepens

 (Adds comment; updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, June 19 (Reuters) - U.S. Treasury yields retreated
on Tuesday as trade tensions between China and the United States
intensified after President Donald Trump threatened to impose a
10 percent tariff on $200 billion of Chinese goods while Beijing
warned it would fight back.
    U.S. 10-year and 30-year yields fell to three-week lows,
while those on two-year notes slid to two-week troughs.
    Trump said his latest move was retaliation following China's
decision to levy tariffs on $50 billion in U.S. goods after
Trump announced similar tariffs on Chinese goods on
    "The markets are now paying more attention to signs of
escalating trade tensions," said Lena Komileva, chief economist
at G+ Economics in London, although she said the risk of a trade
war would not necessarily change the more upbeat global
macroeconomic near-term outlook.
    "The global economy's pain threshold is much higher when
demand is growing at peak capacity and corporate earnings growth
is in double digits," Komileva said.
    U.S. benchmark 10-year yields fell to a three-week low of
2.853 percent, from Monday's 2.926 percent. They
were last at 2.894 percent.
    The low in U.S. 10-year yields is approaching a key
resistance level of 2.849 percent - the 61.8 percent retracement
of June's sell-off, said Ian Lyngen, head of U.S. rates strategy
at BMO Capital in New York.
    He believes there is further momentum in the latest surge in
Treasury prices.
    U.S. 30-year yields dropped to 2.991 percent, a
three-week low as well, compared with 3.055 percent on Monday,
Thirty-year yields last traded at 3.028 percent.
    On the short end of the curve, U.S. two-year yields sank to
a two-week low of 2.496 percent, compared with 2.558
percent late on Monday. Two-year yields last traded at 2.549
    The yield curve, meanwhile, steepened for a third straight
session on Tuesday, at least with respect to the spread between
U.S. 5-year notes and 30-year bonds. That spread widened to
26.90 basis points.
    Gennadiy Goldberg, interest rates strategist at TD
Securities in New York, said a steeper curve is expected in a
trade war given that it could lead to stagflation, preventing
the Federal Reserve from further raising interest rates. 
    Helping to balance out the threat of a trade war was
better-than-expected data on U.S. housing starts.
    Housing starts rose 5.0 percent to a seasonally adjusted
annual rate of 1.350 million units last month, the highest level
since July 2007.
    U.S. yields came off their lows after the data.
    Following the housing starts report, IHS Markit raised its
forecast for U.S. gross domestic product growth in the second
quarter by one-tenth to 4.6 percent.
   Tuesday, June 19 at 1500 EDT (1900 GMT):
 US T BONDS SEP8               144-3/32     0-17/32   
 10YR TNotes SEP8              119-216/256  0-64/256  
                               Price        Current   Net
                                            Yield     Change
                                            (pct)     (bps)
 Three-month bills             1.9075       1.9435    0.016
 Six-month bills               2.075        2.1261    -0.003
 Two-year note                 99-232/256   2.5493    -0.009
 Three-year note               99-236/256   2.6523    -0.022
 Five-year note                99-234/256   2.7685    -0.030
 Seven-year note               100-32/256   2.8549    -0.035
 10-year note                  99-212/256   2.8949    -0.031
 30-year bond                  101-224/256  3.0291    -0.026
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        25.50        -1.00    
 U.S. 3-year dollar swap        22.25        -0.50    
 U.S. 5-year dollar swap        14.25        -0.25    
 U.S. 10-year dollar swap        6.50         0.00    
 U.S. 30-year dollar swap       -6.25         0.00    
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Dan Grebler and Leslie Adler)