TREASURIES-U.S. yields rise as market awaits Fed's tapering move

By Herbert Lash NEW YORK, Oct 21 (Reuters) - U.S. Treasury yields rose on Thursday as a quickly recovering economy renewed questions about when the Federal Reserve will raise interest rates after it has finished tapering its massive bond buying program. The yield on 10-year Treasury notes was up 3.9 basis points to 1.675% after the breakeven inflation rate on 10-year TIPS hit a nine-year high of 2.614% earlier in the session. The number of Americans filing new claims for unemployment benefits dropped to a 19-month low last week, pointing to a tightening labor market. Market participants are in the process of reassessing their outlook on monetary policy as primary dealers are filling out the Fed's survey of their market expectations, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC. People are worried the tightening process begin earlier than the "dot-plot" Fed policymakers now suggests, especially with wages and inflation on the rise, Ricchiuto said. "It’s this back and forth between is inflation really stronger? Is it getting wrapped up into prices and then wages and what does that imply for future inflation?," he said. "By the same token what does it imply for monetary policy and that's the kickback." Demand for the shortest-dated TIPS are providing context on the concern about loftier near-term prices, BMO Capital Markets said. A $19-billion auction of five-year TIPS on Thursday will be the first since June, when the reflation trade had recently peaked, BMO said in a note. The investor class data showed that a remarkable 85% of supply then went to domestic investment funds, a clear indication of the willingness by that investor base to bid aggressively for short-dated inflation protection, BMO said. The yield on the 30-year Treasury bond was up 2.7 basis points to 2.138%. 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 an indicator of economic expectations, was at 125.7 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 4.1 basis points at 0.416%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.834%. The 10-year TIPS breakeven rate was last at 2.623%, indicating the market sees inflation averaging about 2.6% 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 2.563%. Oct. 21 Thursday 10:58AM New York / 1458 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0525 0.0532 -0.003 Six-month bills 0.0575 0.0583 0.002 Two-year note 99-174/256 0.416 0.041 Three-year note 99-158/256 0.7551 0.053 Five-year note 98-114/256 1.2001 0.053 Seven-year note 98-86/256 1.5034 0.049 10-year note 96-44/256 1.6745 0.039 20-year bond 94-44/256 2.1114 0.030 30-year bond 96-244/256 2.1387 0.028 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 17.75 0.75 spread U.S. 3-year dollar swap 14.75 0.25 spread U.S. 5-year dollar swap 7.00 0.00 spread U.S. 10-year dollar swap 0.75 0.00 spread U.S. 30-year dollar swap -22.75 0.25 spread (Reporting by Herbert Lash, Editing by Nick Zieminski)