December 4, 2017 / 7:42 PM / in 11 days

TREASURIES-Yields up after Senate passes tax reform bill, but capped by risk

* Treasury yields rise from late Friday levels after Senate vote

* Mueller investigation limits yield rise

* Bond investors skeptical of tax reform impact on GDP (Updates to afternoon U.S. trading)

By Dion Rabouin

NEW YORK, Dec 4 (Reuters) - U.S. Treasury yields dropped on Monday but remained higher than their levels late on Friday, boosted by increased confidence that the U.S. Congress would enact tax cut legislation after the Senate passed a bill early Saturday.

The Senate must now reconcile its version of the bill with legislation passed by the House of Representatives. Republicans, who control both chambers, are aiming to get a bill to U.S. President Donald Trump’s desk before year-end.

The increased expectation for the tax cut pushed yields on benchmark U.S. 10-year Treasury notes to 2.42 percent overnight in Asian trading.

However, much of that rise was retraced during U.S. trading as investors remained concerned over Michael Flynn, former national security adviser to Trump, and Special Counsel Robert Mueller’s investigation, analysts said.

On Friday, Flynn pleaded guilty to lying to Federal Bureau of Investigation agents and said he was cooperating with Mueller’s probe of Trump’s 2016 presidential campaign and Russia.

Analysts also said bond market traders remain skeptical of the impact the tax legislation will have on U.S. growth.

“I think people in general are very optimistic; it’s looking like it will get passed,” said Societe Generale head of U.S. rates strategy Subadra Rajappa.

“The question is what impact will it have on the economy. That’s where there’s less optimism. People aren’t expecting much growth. It will be positive for stocks, but ... we’re expecting only a very modest impact on (gross domestic product growth) next year.”

U.S. equities were sharply higher, with the S&P 500 and the Dow rising to record highs on the day, led by gains in bank stocks. Strong performance by riskier assets such as stocks generally reduces appetite for safe-haven U.S. government debt.

“The global equity market has performed well on the news and the risk-off sentiment has been the most significant driver in the Treasury market,” Ian Lyngen, interest rates strategist at BMO Capital Markets, said in a note to clients.

The 10-year note was down 5/32 in price, yielding 2.385 percent, up 2 basis points from its Friday close but around 3.5 basis points lower than its Monday opening. (Reporting by Dion Rabouin; Editing by Dan Grebler)

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