June 20, 2018 / 3:11 PM / in a month

TREASURIES-Yields rise on easing risk aversion, Fed's Powell remarks

    * U.S. existing home sales fall in May
    * EU to impose tariffs on U.S. goods
    * U.S. yield curve steepens amid trade war

 (Adds comment, details, table, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, June 20 (Reuters) - U.S. Treasury yields climbed
on Wednesday, recovering from sharp falls the previous session,
as the market took a pause from the worsening trade conflict
between the United States and China and focused on expectations
of further U.S. interest rate increases.
    "The trade issue with China is still ongoing, but the stock
market has stabilized after yesterday's sell-off and that has
helped U.S. yields as well," said Subadra Rajappa, head of U.S.
rates strategy at Societe Generale in New York.
    U.S. yields dropped to multi-week lows on Tuesday after U.S.
President Donald Trump threatened to impose a 10 percent tariff
on $200 billion of Chinese goods, as Beijing warned it would hit
back.
    Following China's actions, the European Union will begin
charging import duties of 25 percent on a range of U.S. products
on Friday, in response to U.S tariffs imposed on EU steel and
aluminum early this month, the European Commission said on
Wednesday.
    Societe's Rajappa said a trade war would not have as much
impact on the U.S. economy as feared because the country's
economic fundamentals are strong and the rate-tightening path
remained firmly in place.
    Federal Reserve Chairman Jerome Powell said as much on
Wednesday, noting that the Fed should continue with a gradual
pace of rate increases given that the labor market does not seem
to be overly tight.
    "With the economy strong and risks to the outlook balanced,
the case for continued gradual increases ... remains strong,"
Powell said in prepared remarks before a central banking
conference in Sintra, Portugal.
    His comments pushed yields higher. Before Powell's remarks,
U.S. yields had been little changed.
    In late morning trading, U.S. benchmark 10-year yields rose
to 2.909 percent, from Tuesday's 2.893 percent.
    U.S. 30-year yields were up at 3.042 percent, 
compared with 3.028 percent on Tuesday.
    U.S. two-year yields were at 2.553 percent,
slightly up from Tuesday's 2.545 percent.
    Yields slipped a little after U.S. home sales unexpectedly
fell in May as an acute shortage of properties pushed house
prices to a record high.
    The yield curve, meanwhile, steepened on Wednesday, with the
spread between U.S. 5-year notes and 30-year bonds widening for
a fourth straight session to 26.90 basis points.
    Another yield curve measure, the gap between U.S. two-year
and U.S. 10-year notes, widened as well, to 36.4 basis points
.
    Some market participants expected a steepening of the yield
curve with a trade war. They said that such a conflict would be
inflationary, which should constrain the Fed from further
raising rates, a scenario which should put a cap on short-term
yields.
    
      June 20 Wednesday 10:57AM New York / 14
    57 GMT
                               Price                  
 US T BONDS SEP8               143-27/32    -0-8/32   
 10YR TNotes SEP8              119-188/256  -0-28/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.895        1.9306    -0.012
 Six-month bills               2.075        2.1261    0.000
 Two-year note                 99-230/256   2.5535    0.008
 Three-year note               99-230/256   2.6606    0.009
 Five-year note                99-220/256   2.7804    0.011
 Seven-year note               100-8/256    2.8698    0.015
 10-year note                  99-180/256   2.9095    0.016
 30-year bond                  101-156/256  3.0425    0.014
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        25.25         0.00    
 spread                                               
 U.S. 3-year dollar swap        22.00         0.25    
 spread                                               
 U.S. 5-year dollar swap        13.50        -0.75    
 spread                                               
 U.S. 10-year dollar swap        5.75        -0.75    
 spread                                               
 U.S. 30-year dollar swap       -7.25        -1.00    
 spread                                               
 
 (Reporting by Gertrude Chavez-Dreyfuss
Editing by Chizu Nomiyama and James Dalgleish)
  
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