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TREASURIES-Yield curve steeper on trade hopes, solid auction results

 (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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