U.S. 30-year yields drop to fresh record low below 2%

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - U.S. 30-year Treasury yields fell to a record low below 2% and benchmark 10-year notes dropped to a three-year trough on Thursday amid persistent worries about global trade tensions and economic slowdowns around the world.

A day after inverting, the U.S. yield curve steepened a little. Curve inversion, which occurs when long-term yields dip below short-term ones, is widely considered a warning that the economy is headed for recession.

"I don't think we have seen a bottom in yields yet," said Gary Pzegeo, head of fixed income at CIBC Private Wealth Management, in Boston.

"We'll likely have a reaction from the Federal Reserve at the next meeting. That could be something that fuels further moves lower in parts of the yield curve depending on how aggressive a stance they take."

Data showing U.S. retail sales increasing by more than expected last month pushed yields a little higher from their lows. The retail numbers suggested fairly robust consumer spending that should help ease worries about a potential U.S. recession.

U.S. retail sales rose 0.7% in July. Economists polled by Reuters had forecast retail sales would rise 0.3%. Excluding automobiles, gasoline, building materials and food services, retail sales jumped 1.0% last month after advancing by an unrevised 0.7% in June.

Other economic reports were not so upbeat, with initial jobless claims worse than expected and the Philadelphia Federal Reserve business conditions data having mixed details.

But the market's focus has been on retail sales.

In morning trading, yields on the U.S. benchmark 10-year Treasury note <US10YT=RR> were last down at 1.558%, from 1.581% late on Wednesday.

Yields on 30-year bonds, which fell earlier from fresh record lows at 1.941%, were last at 2.0% <US30YT=RR> from 2.027% on Wednesday.

At the short end of the curve, U.S. 2-year yields fell to 1.54% from Wednesday's 1.577% <US2YT=RR>.

The spread between 2-year and 10-year note yields widened a bit on Thursday at 1.8 basis points <US2US10=TWEB>.

Wednesday's inversion of this yield curve roiled financial markets because of implications about a possible recession.

Lewis Alexander, chief U.S. economist at Nomura, said the probability of recession has increased, but was not at an acute level. He cited mitigating factors such as the fact that many of the risks to the U.S. economy are from outside the country, although that didn't make it immune to external shocks.

"At this point, we think the risk of a U.S. recession over the next 12 months is somewhat elevated because the economy is slowing and because of a range of risks," Alexander said.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Bernadette Baum)