TREASURIES-US 30-year yields hit highest levels since July, tracking European, UK markets

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 2 (Reuters) - U.S. 30-year Treasury yields on Tuesday climbed to their highest levels since mid-July, at just shy of 5%, in line with advances in European and UK bond markets, as investors feared that governments in major economies around the world including the U.S. are losing control over their fiscal deficits.

In late morning trading, U.S. 30-year bond yields were up 4.4 basis points (bps) to 4.961% US30YT=RR, after earlier hitting 4.999%, the highest in about 1-1/2 months. The benchmark 10-year yield also increased, accelerating by 3.5 bps to 4.261% US10YT=RR, after earlier advancing to a one-week high

The rise in long-end yields was in line with other major bond markets.

Britain's 30-year bond yields soared to their steepest level since 1998 and were last up 5.2 bps at 5.694% GB30YT=RR. Investors sold UK debt a day after Prime Minister Keir Starmer reshuffled his top team of advisers, moving finance minister Rachel Reeves' deputy Darren Jones into Downing Street to better coordinate delivery across government.

In Europe, France's 30-year government bond yields FR30YT=RR hit their highest levels in more than 16 years, once again driven by fiscal concerns, as Prime Minister Francois Bayrou began talks with political parties in a bid to prevent a government collapse.

The German 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, also ascended, hitting a fresh 14-year peak.

"We're looking at deficits and outstanding debt that have been triggered outside the U.S.," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"When I think about the UK, France and so forth, I think it just brings back to light the deficits here in the U.S., the outstanding debt, and the potential inflationary impact from tariffs - all the things that are driving yields higher on a global basis."

The U.S. federal debt is $37.18 trillion, according to the Treasury Department. It has continued to grow under Republican and Democratic administrations as the U.S. Congress keeps authorizing the federal government to spend more money than it takes in.

But according to the Congressional Budget Office, President Donald Trump's increased tariffs on U.S. imports from foreign countries could reduce the national deficit by $4 trillion over the next decade. Higher tariff revenue could shrink primary deficits by $3.3 trillion and cut federal interest payments by $0.7 trillion over the next decade, the CBO said.

The focus this week, meanwhile, will be the monthly U.S. nonfarm payrolls report on Friday, which will be preceded by data on job openings and private payrolls. This data will provide investors and the Fed a more explicit picture of the U.S. labor market that has become more crucial to the current monetary policy outlook.

In addition, the U.S. consumer inflation report for August, due out on September 11, less than a week before the Fed's policy meeting, will also be a key factor in determining whether the U.S. central bank cuts interest rate at that meeting.

U.S. rate futures widely expect the Fed to lower interest rates this month, pricing in a 92% chance of a 25-basis-point cut at the end of the two-day policy meeting on September 17, according to CME Group's FedWatch. Traders have also priced in about 57 bps of rate declines this year, down from about 67 bps two weeks ago.

In other maturities, U.S. two-year yields were up 2.2 bps at 3.645% US2YT=RR.

The Treasury yield curve steepened on Tuesday, with the gap between two-year and 10-year yields hitting 63.60 bps US2US10=TWEB, the widest spread since April. It was last at 62.2 bps, compared with 60.9 bps late on Friday.

The steepening suggested that traders are pricing an imminent rate cut from the Fed and also reflected inflation worries that have prompted investors to sell the long end of the curve.