May 18, 2017 / 1:44 PM / a year ago

TREASURIES-Yields fall on U.S., Brazilian political uncertainty

    * Trump allegations raise doubts about tax cuts, new
    * Brazilian stock plunge boosts safety buying of U.S. bonds
    * U.S. two-, 10-year yield curve flattest since October

    By Karen Brettell
    NEW YORK, May 18 (Reuters) - U.S. Treasury yields fell on
Thursday as investors worried that allegations against U.S.
President Donald Trump would divert lawmakers from tax cuts and
fiscal spending that they had hoped would boost growth.
    Yields on benchmark 10-year notes fell to one-month lows of
2.18 percent on strong buying overnight after Reuters reported
that Michael Flynn and other advisers to Trump’s campaign were
in contact with Russian officials and others with Kremlin ties
in at least 18 calls and emails during the last seven months of
the 2016 presidential race.             
    That came after  the U.S. Justice Department on Wednesday
named former FBI chief Robert Mueller as special counsel to
investigate alleged Russian interference in the election and
possible collusion between the Trump campaign and Moscow.
    “The risk going forward is that this thing goes on and on
and we don’t have a resolution, which means the new
administration is not able to work on its tax initiatives and
regulatory reform,” said Subadra Rajappa, head of U.S. rates
strategy at Societe Generale in New York.
    A plunge in the Brazilian stock market on concerns about
political instability also added to safety buying of U.S. bonds.
    Newspaper O Globo reported on Wednesday that Brazilian
President Michel Temer gave his blessing to an attempt to pay a
potential witness to remain silent in the country's biggest-ever
graft probe, according to plea bargain testimony by a powerful
    “Brazil had been an improving fundamental situation, but
which now has its own re-upped level of political risk at a time
when the broad perception was that the country’s corruption
problems were being addressed,” said Guy LeBas, chief fixed
income strategist at Janney Montgomery Scott in Philadelphia.
    Benchmark 10-year notes             were last down 1/32 in
price to yield 2.26 percent, up from 2.22 percent late on
    The yield curve between two-year notes and 10-year notes
               flattened to 95 basis points, its lowest since
Oct. 27 as investors reached for longer-duration bonds.
    Longer-dated notes are viewed as having more potential
upside than two-year bonds, which are highly sensitive to
interest rate changes. The Federal Reserve is expected to hike
rates next month.
    “The two-year is going to be pegged to Fed expectations, so
if there’s a flight to quality, you’re going to see that
manifest in the back end of the curve," Rajappa said.

 (Editing by Lisa Von Ahn)
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