TREASURIES-U.S. yields on long end rise on higher headline inflation, consumer sentiment

By Gertrude Chavez-Dreyfuss NEW YORK, Dec 9 (Reuters) - U.S. Treasury yields on the long end of the curve gained on Friday after data showed U.S. monthly producer prices came in higher than expected for November, suggesting that interest rates will remain higher for longer. However, the year-on-year rate for underlying producer prices, which exclude food and energy, has declined, giving the Federal Reserve room to slow its tightening pace, as Chair Jerome Powell indicated on November 30. Data showed that the U.S. producer price index for final demand rose 0.3% last month, with the October figure revised higher to show the PPI gaining 0.3% instead of 0.2% as previously reported. Economists polled by Reuters had forecast PPI climbing 0.2% last month. Excluding food and energy, producer prices rose 6.2% year-on-year, higher than forecast as well but lower than the previous month's number of 6.8%. "Inflation is definitely trending down and it's going to come down more," said Brian Reynolds chief market strategist, at Reynolds Strategy. "Treasury yields rose and that's just a knee-jerk reaction." He cited the declining trend in breakeven inflation rates for U.S. Treasury Inflation-Protected Securities (TIPS), which is a "good leading indicator" for the rise in future prices. On Friday, the U.S. two-year breakeven rate fell to 2.355% from 2.407% late on Thursday, suggesting that investors expect inflation to average around 2.35% over the next two years. Since early November, the two-year breakeven inflation rate has fallen by about 57 basis points (bps). U.S. yields further extended gains after data showed consumer sentiment rose in December while inflation expectations eased to a 15-month low. The University of Michigan's preliminary December reading on the overall index of consumer sentiment came in at 59.1, up from 56.8 in the prior month. The survey's reading of one-year inflation expectations fell to 4.6%, the lowest reading in 15 months, from 4.9% in November. In late morning trading, the yield on 10-year Treasury notes rose 5 bps to 3.544%. U.S. 30-year yields were up 6.5 b ps at 3.520 %. A closely-monitored part of the U.S. Treasury curve measuring the spread between yields on two- and 10-year Treasury notes narrowed its inversion to -76.3 bps on Friday. The curve inverted to as much as -85.2 bps on Wednesday, the most in two weeks. This curve's inversion typically foreshadows recession. On the shorter-end of the curve, the two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 0.7 bps at 4.305%. The breakeven rate on five-year TIPS was last at 2.391%, down from Thursday's 2.411% The 10-year TIPS breakeven rate also fell, down at 2.289%, from 2.307% late on Thursday. The Fed is widely expected to raise interest rates by 50 bps at next week's policy meeting. December 9 Friday 10:46AM New York / 1546 GMT Price Current Net Yield % Change (bps) Three-month bills 4.2075 4.3098 0.040 Six-month bills 4.565 4.7353 0.019 Two-year note 100-93/256 4.3046 -0.007 Three-year note 101-48/256 4.0643 0.010 Five-year note 100-154/256 3.7409 0.029 Seven-year note 101-60/256 3.6724 0.040 10-year note 104-196/256 3.5508 0.058 20-year bond 103-4/256 3.783 0.069 30-year bond 108-180/256 3.5267 0.072 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 31.75 0.50 spread U.S. 3-year dollar swap 10.25 -0.50 spread U.S. 5-year dollar swap 3.50 0.25 spread U.S. 10-year dollar swap -2.00 1.00 spread U.S. 30-year dollar swap -35.25 1.75 spread (Reporting by Gertrude Chavez-Dreyfuss)