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TREASURIES-Yields bounce from three-month lows

By Karen Brettell

(Recasts with yield increase; adds quote, data; updates prices) * Three-month, 10-year yield curve briefly inverts * Yields get technical support at bottom of recent range * Treasury to sell $32 bln seven-year notes By Karen Brettell NEW YORK, Jan 28 (Reuters) - Benchmark 10-year Treasury yields bounced off three-month lows on Tuesday, after a key part of the yield curve briefly inverted for the first time since October, as investors continued to assess the economic impact from a virus outbreak in China. The death toll from the virus topped 100 overnight and a number of governments and multinational companies are restricting travel to China. Benchmark 10-year note yields fell as low as 1.57% overnight, the lowest since Oct. 10, before rising back to 1.62%. The yield curve between three-month notes and 10-year government bonds briefly inverted to to -0.015 basis point ,, its lowest since October, before returning to 5 basis points. An inverted curve, when longer-dated yields fall below shorter-maturity ones, has been a fairly reliable signal that a U.S. recession will follow one to two years later. It inverted last March for the first time since the financial crisis. The yield curve can revert and reinvert many times before a recession hits. Yields likely bounced off their lows as they hit technical support at the bottom of their recent range, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. “I think this might just be us reaching some technical points where it’s really hard to break through the 1.60% level,” Rajappa said. The 10-year yields have dropped from a high of 1.76% on Friday as fears about the spreading virus hit risk assets and increased demand for safe-haven bonds. Investors are also preparing for a $32 billion sale of seven-year notes on Tuesday. The Treasury Department sold $40 billion in two-year notes and $41 billion in five-year notes on Monday to slightly soft demand. The Federal Reserve is expected to leave rates unchanged when it concludes its two-day meeting on Wednesday. The recent drop in yields, however, shows an increasing expectation that the U.S. central bank will cut rates later this year. Interest rate futures traders are pricing in a 59% chance of a rate cut in September, according to the CME Group’s FedWatch Tool. Data on Tuesday showed that new orders for key U.S.-made capital goods dropped by the most in eight months in December and shipments were weak, suggesting business investment contracted further in the fourth quarter and was a drag on economic growth. January 28 Tuesday 9:22AM New York / 1422 GMT Price Current Net Change Yield % (bps) Three-month bills 1.535 1.5667 0.000 Six-month bills 1.535 1.5728 -0.002 Two-year note 99-225/256 1.4366 0.002 Three-year note 100-56/256 1.4242 0.010 Five-year note 99-166/256 1.4482 0.011 Seven-year note 101-96/256 1.5397 0.014 10-year note 101-40/256 1.6217 0.017 30-year bond 106-192/256 2.0702 0.015 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 6.75 2.25 spread U.S. 3-year dollar swap 2.50 0.50 spread U.S. 5-year dollar swap -0.25 0.50 spread U.S. 10-year dollar swap -5.25 0.75 spread U.S. 30-year dollar swap -31.25 1.25 spread (Reporting by Karen Brettell; additional reporting by Dhara Ranasinghe and Sujata Rao in London; editing by Jonathan Oatis)