August 10, 2017 / 7:25 PM / 4 months ago

TREASURIES-Yields sag on North Korea tensions, weak U.S. data

* North Korea outlines plan of missile attack on Guam

* Soft U.S. data further cuts Dec rate hike chances

* U.S. 30-year bond auction shows solid outcome (New throughout, updates prices, market activity, comment, auction results, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 10 (Reuters) - U.S. Treasury long-dated yields dropped to six-week lows on Thursday, pressured by continued tensions between the United States and North Korea as well as weak economic data that reduced expectations of an interest rate hike in December.

Over the last two weeks, U.S. 10-year note and 30-year bond yields have fallen 7 to 10 basis points as the North Korean issue has escalated.

A generally solid U.S. 30-year bond auction also firmed demand for long-dated debt, although the specter of North Korea was a major influence on the market.

North Korea on Thursday scoffed at warnings by U.S. President Donald Trump that it would face “fire and fury” if it threatened the United States. The country also outlined detailed plans for a missile strike near the U.S. Pacific territory of Guam.

“There is still a flight-to-quality move as people don’t know what’s going to happen,” said John Bredemus, head of capital markets at Allianz Investment Management in Minneapolis.

U.S. data showed the biggest drop in producer prices in 11 months and an unexpected rise in weekly jobless claims, indicating economic weakness that could delay any coming rate hike by the Federal Reserve.

The U.S. producer price index for final demand slipped 0.1 percent last month, the largest drop since August 2016. U.S. jobless claims were weaker than expected, rising 3,000 to 244,000 for the week ended Aug. 5.

After the data, rates futures priced in a 42 percent chance of a rate hike in December, from a nearly 60 percent a month ago.

In late trading, U.S. 10-year yields slipped to 2.208 percent, a six-week low, from 2.242 percent late on Wednesday.

U.S. 30-year bond yields fell to 2.783 percent, from Wednesday’s 2.818 percent. During the session, yields fell as low as 2.781 percent, a six-week low.

The U.S. Treasury’s $15 billion, 30-year bond auction was solid overall, with a high yield of 2.818 percent, slightly below the expected 2.819 percent at the bid deadline. There were nearly $34.8 billion in bids for a 2.32 bid-to-cover ratio, in line with the 2.31 last month and slightly higher than the 2.27 average.

Indirect bidders, which include foreign central banks, took 66.8 percent, the highest since July 2016.

“Treasuries will be well-bid for the rest of the year simply because there’s still a lot of demand for fixed income investments, there’s a lot of demand for duration,” said Allianz’s Bredemus. “I still think the U.S. is the best place to be.” (Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama, Dan Grebler and David Gdregorio)

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