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TREASURIES-Yields curve steepens on stimulus bill hopes

NEW YORK, Oct 1 (Reuters) - Yields on longer-dated Treasury bonds rose on Thursday morning as investors maintained hopes for the passage of a coronavirus-related stimulus bill in the U.S. Congress, driving the yield curve steeper.

The spread between two- and 10-year yields rose to a high of 58.2 basis points, the steepest the curve has been in a month. While short-term yields have been anchored by the Federal Reserve’s commitment to keeping interest rates near zero for the foreseeable future, the prospect of a stimulus package has decreased demand for longer-dated bonds as risk appetite has increased.

“I think the continued stimulus rhetoric has been driving price action at the long end of the Treasury curve,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald.

U.S. House of Representatives Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were expected to try again on Thursday to reach a deal on pandemic-related relief, while the House stood ready for a second day to move a Democratic bill if talks fail.

The two sides appeared to be about $600 billion apart on spending, as lawmakers prepared to depart Washington for the final weeks of the 2020 presidential and congressional election campaign. Mnuchin has offered a proposal approaching $1.6 trillion. House Democrats were poised to vote on legislation containing $2.2 trillion in aid.

In mid-morning New York trade, the benchmark 10-year yield was last up 1.5 basis points to 0.691%, and the 30-year yield was last up 1 basis point at 1.462%.

The possibility of a Democratic victory in the presidential election in November has also put some pressure on longer-dated yields, Lederer said.

Democratic nominee Joe Biden’s performance at a debate on Tuesday and recent polling from key swing state Pennsylvania have increased market expectations of a Biden victory. Such a victory could ultimately yield more government spending and therefore, further Treasury debt issuance and lower prices on bonds.

“The way the market is looking at a potential Biden - and Democratic - win in November is that it could mean larger spending. It puts some pressure on the long end of the Treasury curve,” Lederer said. (Reporting by Kate Duguid; Editing by Will Dunham)