July 6, 2015 / 7:56 PM / 2 years ago

TREASURIES-Yields fall on rising fears of Greek exit from euro zone

* Benchmark, short-dated yields hover near multi-week lows

* ECB adjusts discount on Greek banks’ collateral for emergency funding

* Fed rate hike prospects limit yield decline (Updates prices, adds comments)

By Sam Forgione

NEW YORK, July 6 (Reuters) - Benchmark U.S. Treasury yields hovered near their lowest in over two weeks on Monday after the European Central Bank adjusted the discount on Greek banks’ collateral for emergency funding, raising fears of a Greek exit from the euro zone.

The ECB kept Emergency Liquidity Assistance (ELA) steady for Greek banks but adjusted the haircut on the collateral those lenders offer as security, the ECB said on Monday. The move came a day after Greeks overwhelmingly rejected conditions of a rescue package from creditors.

Stunned European leaders called a summit for Tuesday to discuss their next move after the surprisingly strong victory by the ‘No’ camp on Sunday defied opinion polls that had predicted a tight contest. Concerns over Greece drove safe-haven demand for Treasuries.

“Some might perceive the risk of a bad outcome in Greece has marginally increased” since the ECB has made it slightly more expensive for Greek banks to access ECB liquidity, said Boris Rjavinski, a strategist at UBS in Stamford, Connecticut.

U.S. 30-year bond yields, which move inversely to prices, hit a two-week low of 3.068 percent after the ECB’s adjustment. Yields on Treasuries maturing between 2-10 years hovered near their session lows, including a more than two-week low for 10-year yields and seven-week lows for two- and three-year yields, which were hit shortly after the results of Sunday’s referendum.

Analysts also said concerns over China supported Treasuries, since traders were skeptical that an unprecedented series of support measures unleashed by Beijing would resolve slowing growth in the world’s second-biggest economy.

“It doesn’t appear that there’s a lot of confidence that these measures will help prop up the economy,” said Kim Rupert, managing director at Action Economics in San Francisco.

Analysts said lingering expectations that the Federal Reserve could hike rates in September, despite a weaker-than-expected U.S. employment report for June released last week, limited the declines in shorter-dated Treasuries yields.

Shorter-dated yields are believed to be most vulnerable to Fed rate hikes, which are expected to hurt Treasuries prices.

U.S. 10-year notes were last up 28/32 in price to yield 2.290 percent, from a yield of 2.391 percent late Thursday. U.S. 30-year bonds were last up 1-31/32 in price to yield 3.088 percent, from a yield of 3.192 percent late Thursday.

U.S. three-year notes were last up 5/32 to yield 0.939 percent, from a yield of 0.995 percent late Thursday. (Reporting by Sam Forgione; Editing by Bernadette Baum and Chizu Nomiyama)

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