TREASURIES-U.S. yields fall as euro hits near two-year peak

    * European yields fall as euro hits near two-year peak vs
    * U.S. one-month rate volatility at record low -BAML data
    * Trading volume light in absence of major U.S. economic

    By Richard Leong
    NEW YORK, July 21 (Reuters) - U.S. Treasury yields fell on
Friday in step with European yields as the euro hit a near
two-year high against dollar, raising doubts whether the
European Central Bank would scale back its bond purchases later
in 2017.
    Medium and longer-dated yields touched three-week lows as
benchmark German 10-year yields hit a two-week trough. The
euro's surge, if sustained, would hurt European exporters and
possibly force ECB policymakers to delay any plans to reduce
quantitative easing.
    "This is a directionality with the euro. The U.S. and Bunds
spread is moving on that after the ECB meeting," Subadra
Rajappa, head of U.S. rates strategy at SG Corporate &
Investment Banking in New York.
    On Thursday, the ECB stuck to its ultra-loose policy stance
as Europe's inflation remained below 2 percent, but currency
traders perceived ECB President Mario Draghi's comments at his
news conference as supportive to build bullish bets on the euro
    The single currency rose to $1.1677 earlier on Friday, the
strongest since Aug. 24, 2015, while German 10-year yields
 traded as low as 0.496 percent, a two-week trough,
Reuters data showed.
    At 10:40 a.m. (1440 GMT), the benchmark 10-year Treasury
yield was down more than 2 basis points at 2.243
percent after hitting a three-week low of 2.236 percent.
    Trading volume was light in the absence of major U.S.
economic data and some caution ahead of the Federal Reserve's
two-day policy meeting that will begin on Tuesday.
    Expectations that the U.S. central bank will leave key
overnight borrowing costs unchanged partly fed the decline in
short-term interest rate volatility.
    An index compiled by Bank of America Merrill Lynch on
one-month volatility on Treasury yields has fallen
in the past two weeks, recording an all-time low of 46.999 on
July 21 Friday 10:39AM New York / 1439 GMT
 US T BONDS SEP7               154-20/32    0-18/32   
 10YR TNotes SEP7              126-64/256   0-48/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.145        1.1641    0.020
 Six-month bills               1.0925       1.1137    -0.002
 Two-year note                 99-208/256   1.3484    -0.012
 Three-year note               99-254/256   1.5026    -0.010
 Five-year note                99-186/256   1.8081    -0.015
 Seven-year note               99-164/256   2.0558    -0.022
 10-year note                  101-40/256   2.2429    -0.023
 30-year bond                  103-196/256  2.8125    -0.023
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        24.50         0.25    
 U.S. 3-year dollar swap        20.75         0.75    
 U.S. 5-year dollar swap         8.00         0.25    
 U.S. 10-year dollar swap       -3.25         0.25    
 U.S. 30-year dollar swap      -30.75         0.00    

 (Reporting by Richard Leong; Editing by Meredith Mazzilli)

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