(Updates after auction results; adds analyst comment) By Ross Kerber Aug 25 (Reuters) - Longer-term U.S. Treasury yields were higher on Tuesday and a closely watched part of the yield curve steepened as investors moved into riskier assets on trade hopes and a solid auction of 2-year notes. But risk enthusiasm was tempered after the Conference Board reported that U.S. consumer confidence dropped to a six-year low in August with households worried about the labor market and incomes. The benchmark 10-year yield was up 3.9 basis points at 0.6851% in afternoon trading after reaching as high as 0.716% in the morning, its first time above 0.7% since Aug. 17. The Treasury sold $50 billion worth of 2-year notes, a record amount, at auction on Tuesday at a high yield of 0.155%. The figure matched the results of a similar 2-year auction a month ago and both were the lowest ever, according to Ben Jeffery, BMO Capital Markets rates strategist. Dealers accounted for 28.7% of accepted bids, compared with an average of 35%, he said, indicating solid demand despite the rush of new issuance by the Treasury to fund economic stimulus measures. "The fact that these record-large auctions continue to be absorbed without any market distortion is a good sign for them to be able to continue to borrow money at these low yields," Jeffery said. After the auction, the 2-year Treasury yield, which typically moves in step with interest rate expectations, was up half a basis point at 0.1575% in afternoon trading. The earlier rise in yields reflected investors' moving out of the safe-haven assets, said Eric Jussaume, director of fixed income at Cambridge Trust. "It's a risk-on trade environment, so money is coming out of Treasuries," he said. Investors may also be expecting more inflation, he said, expectations that could be clarified when Federal Reserve leaders speak at an annual gathering later this week. Top U.S. and Chinese trade officials reaffirmed their commitment to a Phase 1 trade deal and discussed how to increase lagging Chinese purchases of American goods, lending support to financial markets on Tuesday. Although the S&P 500 opened at a record high on Tuesday on the trade news, by afternoon it was little changed with investors moving to the sidelines following a three-day rally. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on 2- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 53 basis points, about 3 basis points higher than Monday's close and well above its recent low of 33 basis points reached on July 24. August 25 Tuesday 1:59PM New York / 1759 GMT Price Current Net Yield % Change (bps) Three-month bills 0.1 0.1014 -0.003 Six-month bills 0.115 0.117 -0.005 Two-year note 99-240/256 0.1575 0.005 Three-year note 99-210/256 0.1857 0.011 Five-year note 99-198/256 0.2963 0.016 Seven-year note 99-60/256 0.4875 0.028 10-year note 99-108/256 0.6851 0.039 20-year bond 99-16/256 1.1778 0.046 30-year bond 99-156/256 1.391 0.042 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.00 0.50 spread U.S. 3-year dollar swap 6.00 0.00 spread U.S. 5-year dollar swap 4.50 0.25 spread U.S. 10-year dollar swap -1.00 0.00 spread U.S. 30-year dollar swap -37.25 0.75 spread (Reporting by Ross Kerber in Boston; editing by Jonathan Oatis and Leslie Adler)
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