Yields rise as investors focus on further rate hikes



By Karen Brettell

NEW YORK, Aug 11 (Reuters) - Benchmark U.S. Treasury yields hit a more than two-week high on Thursday as investors bet the U.S. Federal Reserve will press on hiking rates as inflation remains high, even though price pressures are showing signs of abating.

Data on Thursday showed U.S. producer prices unexpectedly fell in July. It came a day after news that the Consumer Price Index (CPI) for July was unchanged on the month, but up at an annual rate of 8.5%.

"Even if they're seeing slowing inflation and a slowing of the economy, they will still hike rates. Why? Because inflation still has an 8% handle on it. It's still far too high," said Padhraic Garvey, regional head of research, Americas at ING.

Markets have been whipsawed as expectations change on whether the U.S. central bank is likely to raise rates by 50 basis points or 75 basis points at its September meeting.

The odds of a 75 basis points hike dropped on Wednesday following U.S. consumer price data. They had increased after Friday's jobs report for July showed U.S. job growth had unexpectedly accelerated.

Fed funds futures traders are now pricing in a 58% chance of a 50-basis-point hike in September and a 42% chance of a 75-basis-point increase. FEDWATCH

The fed funds rate is expected to rise to 3.65% by March, from 2.33% now. USONFFE=

The Fed may want to raise rates another 75 basis points as it would be more difficult to hike once the economy slows, said Tom di Galoma, managing director at Seaport Global Holdings, noting that inflation remains "quite high."

"I think the Fed wants to increase rates as quickly as they can so they can lower them once the slowdown takes place," di Galoma said. "The yield curve doesn't invert like this unless there is going to be a fairly broad recession coming."

Concerns that the Fed's tightening will spark an economic slowdown have sent yields on longer-dated debt below those on shorter-dated notes.

The closely watched yield curve between two- and 10-year notes US2US10=TWEB was at minus 35 basis points on Thursday, after reaching minus 56 basis points on Wednesday, the deepest inversion since 2000.

An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in 12-to-18 months.

Benchmark 10-year note yields US10YT=RR reached 2.902% on Thursday, the highest since July 22. Two-year note yields US2YT=RR rose two basis points to 3.229%.

Long-dated yields also rose on Thursday on soft demand for a $21 billion sale of new 30-year bonds, the final sale of $98 billion in new coupon-bearing supply this week.

The bonds sold at a high yield of 3.106%, more than a basis point higher than before the auction. Demand was 2.31 times the debt on offer, the weakest ratio since April. USAUCTION28

The 30-year bond yields US30YT=RR rose to 3.189% in the secondary market, the highest since July 21.

Demand was solid for a $35 billion sale of 10-year notes on Wednesday and a $42 billion sale of three-year notes on Tuesday.

August 11 Thursday 3:00PM New York / 1900 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 2.5075

2.5584

-0.039 Six-month bills US6MT=RR

2.9575

3.0438

-0.011 Two-year note US2YT=RR

99-145/256 3.2289

0.015 Three-year note US3YT=RR

99-218/256 3.1773

0.030 Five-year note US5YT=RR

98-234/256 2.9867

0.065 Seven-year note US7YT=RR

97-248/256 2.9496

0.090 10-year note US10YT=RR

98-212/256 2.8857

0.105 20-year bond US20YT=RR

97-240/256 3.3939

0.115 30-year bond US30YT=RR

94-76/256

3.1724

0.130

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

29.25

2.25

spread

U.S. 3-year dollar swap

11.00

1.50

spread

U.S. 5-year dollar swap

4.00

0.75

spread

U.S. 10-year dollar swap

5.00

0.50

spread

U.S. 30-year dollar swap

-31.50

-0.25

spread



U.S. retail sales unexpectedly fall in May

Americans feel the heat as U.S. annual inflation posts largest gain since 1981



Reporting by Karen Brettell; Editing by Susan Fenton and Richard Chang

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