(Adds context, fresh data) By Herbert Lash NEW YORK, July 26 (Reuters) – U.S. Treasury yields fell sharply on Tuesday, dragged down by a flight to safety following Russia’s latest gas supply cuts in Europe and growing concerns about a slowdown in the US economy after Walmart’s profit warning. The two- and 10-year Treasury yield spread, indicating a likely recession when the short-term yield is higher than the long-term yield, reversed for more than two weeks and widened further to – 26.1 basis points. The two-year yield fell 3.3 basis points to 3.002%, less than the decline in 10-year bonds, which fell 7.7 basis points to 2.743%. “As the negative news out of Europe took place, the euro fell and the yen fell, while the dollar rose again,” said Steven Ricchiuto, chief US economist at Mizuho Securities USA LLC. “US macro conditions, global macro conditions, could lead to an environment in which outsiders can seek to capture yield in the Treasury space,” he said. “If you are a global investor, where are you going to put your money? Shares of Walmart Inc fell 8.8% after the major U.S. retailer slashed its profit forecast, a stark indication of its customers’ pullback from discretionary buying as they battle the impact of a high inflation. Another closely watched part of the yield curve, the spread between three-month and 10-year bills narrowed to 21.1 basis points from a spread of 118.51 at the July 1 close. . An inversion could mean a recession. Bond yields were lower across the US yield curve, following the earlier movement of their European counterparts. Russia tightened its gas tightening on Monday. Gazprom said supplies through the Nord Stream 1 gas pipeline to Germany would fall to just 20% of capacity. The supply crisis and calls for energy rationing are expected to tip the euro currency bloc into recession, while keeping inflation high. The 30-year Treasury bond yield fell 6.6 basis points to 2.984%. The five-year US Treasury Inflation-Protected Securities (TIPS) break-even rate was last at 2.599%. The 10-year TIPS break-even rate was last at 2.364%, indicating that the market expects inflation to average around 2.4% per year over the next decade. The US dollar 5-year inflation-linked swap, considered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, last stood at 2.378%. July 26 Tuesday 10:31 New York / 1431 GMT Price Current Net Yield % Change (bps) Three-Month Notes 2.48 2.5305 -0.031 Six-Month Notes 2.89 2.9737 -0.015 Two-Year Notes 99-255 /256 3.002 -0.033 Three 5-year bond 100-48/256 2.9333 -0.050 5-year bond 101-234/256 2.8307 -0.069 7-year bond 102-176/256 2.8199 -0.075 10-year bond 101-28/256 2.7449 -0.075 20-year bond 100-88/256 bond 3.2262 -0.068 30-year bond 97-208/256 2.9862 -0.064 DOLLAR SWAP SPREADS Last (bps) Net change ( bps) US dollar swap 2 years 22.25 -0.25 US dollar spread 3 years swap 7.50 -0.50 US dollar spread 5 years swap -0.25 0.25 US dollar spread 10 years swap 7.25 0 .00 spread US dollar 30-year swap -24.50 1.00 spread (Report by Samuel Indyk; edited by Dhara Ranasinghe, Mark Heinrich and Jonathan Oatis)

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