September 20, 2018 / 7:57 PM / in 7 months

TREASURIES-U.S. long-term yields decline on trade, Brexit uncertainty

    * China says U.S. should correct its behavior on trade
    * Brexit tension heats up, but deal seen in October
    * Market shrugs off upbeat U.S. data

 (Adds comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 20 (Reuters) - U.S. long-dated Treasury
yields fell on Thursday, as persistent U.S.-China trade tensions
and uncertainty over Brexit spurred investors to seek the safety
of government bonds.
    Upbeat U.S. economic data briefly pushed yields higher, but
investors were mostly focused on the conflict between the
world's two largest economies.
    China said on Thursday it hoped the United States would show
sincerity and take steps to correct its behavior after both
countries slapped new tariffs on each other's goods this week in
an escalating trade war.
    Some analysts were concerned China would resort to other
non-trade measures to retaliate, such as moving away from buying
U.S. Treasuries.
    "I don't know if there is any credible reason to believe
that at this time," said Lou Brien, market strategist, at DRW
Trading in Chicago. "But you get the market acting nervous, even
though I am not a big believer that China would back away from
Treasuries, but you never know."
    China remains the largest non-U.S. holder of Treasuries, but
in July its holdings of U.S. government bonds declined to $1.171
trillion. China's July outflow of Treasuries was the third in
the last four months.
    Uncertainty on Brexit also weighed on U.S. yields, analysts
said, citing testy negotiations between Britain and the European
    British Prime Minister Theresa May said on Thursday the UK
was prepared to leave the EU without an agreement unless there
was a proposal it deemed acceptable.
    EU leaders, on the other hand, said they would push for a
Brexit deal next month but warned the UK leader that if she did
not give ground on trade and the Irish border by November, the
group was ready to cope with Britain crashing out.
    In afternoon trading, U.S. 10-year yields were last at 3.073
 percent, down from 3.083 percent late on Wednesday.
    Capital Economics market economist Oliver Jones said U.S.
Treasury yields might be nearing a peak, which the firm
forecasts would be 3.25 percent on the 10-year note.
    "We think the U.S. economy will slow sharply in 2019, as the
fiscal stimulus fades and Fed (Federal Reserve) tightening
bites," said Jones.
    "In our view, this will bring the Fed's tightening cycle to
an end in the middle of next year and raise the possibility of
rate cuts further ahead."
    U.S. 30-year yields were at 3.208 percent, down
from Wednesday's 3.237 percent.
    U.S. 2-year yields were unchanged at 2.8076 percent
, from levels on Wednesday.
    Data showing better-than-expected U.S. jobless claims and a
higher Philadelphia Federal Reserve manufacturing index briefly
lifted yields earlier in the session.
      September 20 Thursday 3:25 PM New York/1925 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.1275       2.1686    0.003
 Six-month bills               2.305        2.3644    -0.001
 Two-year note                 99-168/256   2.8076    0.001
 Three-year note               99-150/256   2.8958    0.000
 Five-year note                99-12/256    2.9585    -0.002
 Seven-year note               98-60/256    3.0338    -0.006
 10-year note                  98-80/256    3.0738    -0.009
 30-year bond                  96           3.209     -0.028
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        18.50         1.00    
 U.S. 3-year dollar swap        15.50         0.75    
 U.S. 5-year dollar swap        12.50         1.00    
 U.S. 10-year dollar swap        6.50         1.00    
 U.S. 30-year dollar swap       -6.00         1.75    
 (Reporting by Gertrude Chavez-Dreyfuss; Editing by Richard
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