TREASURIES-Yields lower on soft manufacturing report

(Updates market activity, adds details on TIPS) By Ross Kerber Aug 2 (Reuters) - Traders sent U.S. Treasury yields lower on Monday as a soft manufacturing report raised questions about the economy's growth prospects. The benchmark 10-year yield was down 7.8 basis points at 1.1607% in afternoon trading, continuing a pattern of declines playing out since the spring. It touched as low as 1.151%, the lowest since July 20, shortly after a report from the Institute for Supply Management showed U.S. manufacturing continued to grow in July but at a slower pace for the second straight month. The report reinforced the idea that economic growth may have peaked, said Jim Barnes, director of fixed income for Bryn Mawr Trust, driving investors into safe Treasuries. "It's the theme where supply constraints may be constraining economic growth," he said. The yield on 10-year Treasury Inflation Protected Securities was at -1.204% after reaching as low as -1.214%, its latest record trough. The 10-year TIPS break-even inflation rate slipped to 2.37%, indicting the market was pricing in a slightly lower inflation rate than on Friday. The demand for Treasuries came despite higher equity markets on anticipation of infrastructure spending and strong second-quarter earnings. A surge in U.S. COVID-19 cases stemming from the highly infectious Delta variant, particularly in areas with lower vaccination rates, threatens to interrupt previous forecasts of a strong economic recovery. Traders will learn more context later on Monday when the Treasury announces its funding plans for the third quarter. The government’s two-year debt ceiling suspension expired on Saturday, though it is expected to be able to get by until October or later by using extraordinary measures. These may include suspending some investments and security issuance. A closely watched part of the yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, also moved lower. It was 99 basis points, about 5 basis points below Friday's close. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.6 basis points at 0.1721%. August 2 Monday 12:37PM New York / 1637 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0475 0.0482 0.002 Six-month bills 0.0525 0.0532 0.000 Two-year note 99-232/256 0.1721 -0.016 Three-year note 100-42/256 0.319 -0.029 Five-year note 99-232/256 0.6441 -0.059 Seven-year note 100-104/256 0.9398 -0.072 10-year note 104-72/256 1.1607 -0.078 20-year bond 108-120/256 1.742 -0.067 30-year bond 112-80/256 1.8364 -0.058 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.75 0.25 spread U.S. 3-year dollar swap 12.00 -0.25 spread U.S. 5-year dollar swap 9.00 0.25 spread U.S. 10-year dollar swap 2.75 0.50 spread U.S. 30-year dollar swap -25.00 -0.50 spread (Reporting by Ross Kerber in Boston; Editing by Andrea Ricci and Dan Grebler)