TREASURIES-U.S. yields fall after UK tax turnaround

NEW YORK, Oct 3 (Reuters) - The benchmark U.S. 10-year Treasury yield fell on Monday, after British Prime Minister Liz Truss was forced to reverse course on a tax cut for the highest rate that had helped rattle financial markets in recent days.

Truss had planned to completely eliminate a tax of 45% on the top rate on income before backing down, part of a plan that led the Bank of England to step in and announce plans to purchase government debt to support the market.

"What was happening overseas and specifically in the UK and their fiscal policy changes, that was the piece that added an extra leg of volatility, specifically to the fixed income markets here," said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

"This morning with what appears to be the UK stepping things back a bit, the market is taking its cue from some of the bond activity happening overseas."

The yield on 10-year Treasury notes was down 18.3 basis points to 3.621%.

The yield on the 30-year Treasury bond was

down 10 basis points

to

3.664

%.

Yields extended declines following

economic data

that showed manufacturing activity in September was the slowest in nearly 2-1/2 years as new orders contracted, indicating the rising interest rates being used to combat inflation may have softened demand for goods.

Investors will eye a flurry of data this week, including several reports on the labor market culminating with Fridays U.S. payrolls report. Signs of a softening in the jobs data would likely be welcomed by investors as it could signal the U.S. Federal Reserve's attempts to slow the economy and tamp down inflation may be starting to have an effect.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as a reliable indicator of an economic recession, was at -45.3 basis points, up from -57.85 hit two weeks ago.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 13.7 basis points at 4.072%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.211%, after closing at 2.147% on Friday, which marked its lowest close in about 20 months.

The 10-year TIPS breakeven rate was last at 2.152%, indicating the market sees inflation averaging 2.15% a year for the next decade. (Reporting by Chuck Mikolajczak; Editing by Andrea Ricci)