October 23, 2018 / 1:48 PM / 2 months ago

TREASURIES-Bond prices gain as tumbling stocks prompt safety buying

* Benchmark yields lowest since Oct 3

* Treasury to sell $38 bln two-year notes

By Karen Brettell

NEW YORK, Oct 23 (Reuters) - Benchmark U.S. Treasury prices rose on Tuesday, sending yields to their lowest levels in almost three weeks as tumbling equity markets worldwide fed investor demand for low-risk debt.

China’s main stock indexes resumed a downward spiral a day after the blue-chip index posted its biggest gains in nearly three years, as investors remained pessimistic about economic prospects and risks posed by shares pledged for loans.

“Markets are getting a little bit nervous about China in general and that’s weighing on equities” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. “Rate markets are starting to notice that there’s a little bit of uncertainty, so you do have a bit of a flight to safety.”

U.S. stocks were also weighed down as disappointing earnings from industrial bellwethers Caterpillar and 3M piled on to concerns over Saudi Arabia’s diplomatic isolation, Italy’s finances and trade war fears.

Benchmark 10-year notes gained 18/32 in price to yield 3.128 percent, the lowest yield since Oct. 3 and down from 3.194 percent on Monday. The yield curve between two-year and 10-year notes flattened to 25 basis points, also the lowest level since Oct. 3.

The Treasury Department will sell $38 billion in two-year notes on Tuesday, the first sale of $108 billion in coupon-bearing supply this week.

The auction will be watched for any indications of soft demand, after foreign accounts including central banks reduced purchases of two-year notes at last month’s auction. Wall Street dealers have had to absorb a greater share of the U.S. government’s rising debt supply in the last month.

The Treasury will also sell $39 billion in five-year notes on Wednesday and $31 billion in seven-year notes on Thursday.

Tuesday’s safety buying overcame concerns about rising inflation and more hawkish Federal Reserve policy, with the U.S. central bank expected to continue hiking interest rates.

Fed speakers on Tuesday include Atlanta Fed President Raphael Bostic, Dallas Fed President Robert Kaplan and Chicago Fed President Charles Evans.

This week’s economic focus is Friday’s reading of gross domestic product for the third quarter. (Editing by David Gregorio) )

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