TREASURIES-US 30-year yields advance amid fiscal worries, track 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 those on European and UK bonds, as investors feared that governments in major economies around the world are losing their grip over their fiscal deficits.

Market participants also returned from a long holiday weekend that celebrated U.S. Labor Day on Monday.

In afternoon trading, U.S. 30-year bond yields were up 5.8 basis points (bps) at 4.976% US30YT=RR, after earlier hitting 4.999%, the highest in about 1-1/2 months. The yield was on track for its largest daily increase since July 11.

The benchmark 10-year yield also increased, accelerating by 5.3 bps to 4.279% US10YT=RR, after earlier advancing to a one-week high. It was on pace for its biggest one-day rise since July 15.

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

Britain's 30-year bond yields soared to their steepest since 1998 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.

"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," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

The U.S. federal debt is $37.18 trillion, according to the Treasury Department, continuing to grow under Republican and Democratic administrations.

The U.S. Congress will also have less than a month to work on keeping federal agencies funded and averting a partial government shutdown. Lawmakers have to agree on the roughly $1.8 trillion in discretionary spending in the $7 trillion federal budget.

"A shutdown is very possible...and that's never good news for capital markets," said Stan Shipley, managing director and fixed income strategist at Evercore ISI.

The focus this week, meanwhile, will be on 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, is also a key factor in determining whether the U.S. central bank cuts interest rates at that meeting.

US RATE CUT OUTLOOK

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

Tuesday's data showing an increase in the Institute for Supply Management's (ISM) survey to 48.7 in August from a 9-month low of 48.0 in July, leaving the index further above the 15-month low of 46.9 in October, triggered buying of Treasuries, but didn't change the rate-cut outlook this month. That pushed Treasury yields off their highs.

Economists polled by Reuters had forecast the PMI would rise to 49.0.

"Despite the miss on the headline index and continuing decline in production, the ISM manufacturing report for August showed tantalizing signs of stabilization," wrote Scott Anderson, chief U.S. economist at BMO in a research note after the data.

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.