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TREASURIES-Most U.S. yields fall on renewed recession jitters

(Updates with comment, fresh prices) By Herbert Lash NEW YORK, May 11 (Reuters) - Treasury yields fell on Wednesday after U.S. consumer price data showed the pace of inflation slowed in April, but not enough to ease concerns that the Federal Reserve's agenda to cool rising prices may induce a recession. The Labor Department said the consumer price index rose 0.3% last month, the smallest gain since August, while on an annual basis it rose 8.3%, less than the year-over-year 8.5% pace in March but more than analysts' 8.1% forecast. The yield on 10-year Treasury notes fell 5.9 basis points to 2.934%, while the two-year note's yield, which often reflects the Fed rate outlook, hit a more than three-year high of 2.858% before backing off a bit. The two-year was last up 2.2 basis points at 2.645%. "The data was hotter than expected, and markets turned on it," said Brian Dorst, senior trader at Themis Trading LLC. "The Fed will stay the course because the estimates aren't that far off. It's not extremely shocking, but it shows that inflation is very much front and center." The Fed raised its policy rate by half a percentage point last week, the biggest hike in 22 years. The Fed began raising rates in March when it took an aggressive stance on inflation and markets decided the U.S. central bank was behind the curve. "The volatility of all the markets is really something, the whiplash aspect of the day," said Lou Brien, market strategist at DRW Trading. "You're seeing a bit of a flight to safety and maybe the idea that even with the CPI today that we're going to re-flatten the curve." The gap between yields on two- and 10-year Treasury notes , a gauge used to judge recession risk, narrowed to 28.7 basis points from 38.07 at the session's start. When the two-year yield is greater than the 10-year, the curve inverts and suggests a recession lies ahead. "If you were able to chart the expectations of a recession they're probably on the uptick," Brien said. Rate hikes alone will not solve the tight U.S. labor market, supply chain problems, rising commodity prices or the effects of fiscal stimulus on inflation, said Nancy Davis, founder of Quadratic Capital Management. "We should not assume that the Federal Reserve will be able to control inflation," Davis said in an email. "If the Fed is too aggressive with its efforts to slow inflation, they might end up hurting the overall economy and the jobs market." Treasury yields had fallen before the CPI was released from Monday's highs that pushed the 10-year note to a peak last seen in November 2018. The 30-year Treasury bond's yield was down 7.5 basis points to 3.054%. U.S. inflation breakevens, a measure of inflation expectations, fell. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) slid to 2.9094%, the lowest since late February. The yield on U.S. five-year TIPS again touched positive territory, the highest since late December. It was last at -0.089%. The 10-year TIPS breakeven rate was last at 2.713%, indicating the market sees inflation averaging about 2.7% a year for the next decade. The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.622%. May 11 Wednesday 2:38PM New York / 1838 GMT Price Current Net Yield % Change (bps) Three-month bills 0.895 0.9095 0.002 Six-month bills 1.39 1.4193 0.002 Two-year note 99-185/256 2.6453 0.022 Three-year note 99-198/256 2.8294 -0.006 Five-year note 99-80/256 2.8995 -0.019 Seven-year note 99-130/256 2.9536 -0.043 10-year note 91-16/256 2.9343 -0.059 20-year bond 86-252/256 3.2746 -0.066 30-year bond 84-92/256 3.0536 -0.075 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 27.50 0.00 spread U.S. 3-year dollar swap 14.25 -0.50 spread U.S. 5-year dollar swap 5.00 -0.75 spread U.S. 10-year dollar swap 5.50 0.00 spread U.S. 30-year dollar swap -27.25 -0.50 spread (Reporting by Herbert Lash; Additional reporting by Anisha Sircar in Bengaluru; Editing by Alison Williams, Kirsten Donovan)

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