TREASURIES-US yield curve flattens on China trade talks; Fed in focus

(adds dropped word "to" in first paragraph, corrects spelling of Mischler in 4th paragraph)

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US yield curve flattening driven by US-China trade talks

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Focus on Fed's Powell's comments post-meeting on tariffs

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US rate futures price in Fed cut in July

By Gertrude Chavez-Dreyfuss

NEW YORK, May 7 (Reuters) - The U.S. Treasury yield curve flattened on Wednesday, as yields on the long end were lower than those on the front end, with investors attributing the move to the U.S.-China trade meeting news overnight and continued spillover effect from the well-received 10-year note auction on Tuesday. Moves overall were subdued ahead of the outcome later on Wednesday of the meeting of the Federal Open Market Committee, the Federal Reserve's policy-setting body. The FOMC is widely anticipated to keep its benchmark overnight interest rate in the 4.25%-4.50% range.

The spread between two-year and 10-year yields narrowed to 48.8 basis points on Wednesday, compared with 51 bps late on Tuesday. Typically under a Federal Reserve easing cycle, the curve generally steepens, with yields on short-dated Treasuries tethered to rate cuts.

"There's some optimism that the U.S. and China will come up with some decision on tariffs, or something big might happen and the Fed might not have to do anything just yet," said Tom di Galoma, managing director of rates and trading, at Mischler Financial, in Park City, Utah. "Therefore can either invert or flatten quite a bit." U.S. Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet China's economic tsar He Lifeng in Switzerland this weekend for talks that could be the first step toward resolving a trade war disrupting the global economy.

News of the planned Geneva meeting, first announced by Washington late on Tuesday, sent U.S. equity futures higher. Wall Street shares were last on the day. Stock markets in China and Hong Kong followed suit during Asian trading on Wednesday. A well-subscribed U.S. 10-year note offering on Tuesday also prompted demand on the long end of the curve, pushing their yields lower.

In late morning trading, the 10-year yield fell 3.1 basis points (bps) to 4.289%.

U.S. 30-year yields also dropped, down 4.6 bps to slipped 1.4 bps to 4.767%.

On the front end of the curve, U.S. two-year yields rose 1.6 bps to 3.807%.

The benchmark federal funds futures market has priced in a more than 70% chance that the U.S. central bank will resume its rate cuts at its July 29-30 policy meeting, according to LSEG calculations. It also sees about 80 bps of easing this year.

"We'll be focused on how Chairman (Jerome) Powell positions the uncertainty from the tariff policy and the ongoing trade war, and more importantly than the tariffs themselves is the amount of uncertainty and halt that they have caused in global commerce," said Zachary Griffiths, head of investment grade and macro strategy at CreditSights in Charlotte. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Will Dunham)