TREASURIES-U.S. yields rise as speculation on Fed easing ebbs

NEW YORK, Oct 28 (Reuters) - U.S. Treasury yields rose on Friday after data showed underlying inflation pressures remain elevated and suggested the Federal Reserve will keep its aggressive interest rate hiking campaign. The personal consumption expenditures price index rose 6.2% in the 12 months through September to match the prior month's rise. The core PCE price index, which excludes food and energy, advanced 5.1% annually after increasing 4.9% in August. Market rates had declined over the past week on speculation the Fed could soon pause its hiking, but with inflation not showing a significant decline, that view dissipated. "The market reaction makes sense," said Priya Misra, head of global rates strategy at TD Securities. "Inflation will not allow the Fed to pause anytime soon." Fed funds futures are pricing in a 98.4% probability that the Fed will raise rates by 75 basis points when policymakers meet Nov. 1-2. In the past week the market has cut expectations on yields peaking at almost 5% in March 2023 to 4.85% in May. With few signs of inflation abating, the yield spread on three-month bills and 10-year notes remained negative at -12.3 basis points. The yield on 10-year notes rose 2.6 basis points to 3.965%, while the 30-year yield was down 0.3 basis points to 4.091%. The two-year yield, which typically moves in step with interest rate expectations, was up 4.8 basis points at 4.369%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.654%. The 10-year TIPS breakeven rate was last at 2.503%, indicating the market sees inflation averaging about 2.5% 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 2.558%. Oct. 28 Friday 9:57 AM New York / 1357 GMT Price Current Net Yield % Change (bps) Three-month bills 3.9875 4.0822 0.035 Six-month bills 4.345 4.5021 0.054 Two-year note 100-3/256 4.3688 0.048 Three-year note 99-196/256 4.3347 0.052 Five-year note 99-240/256 4.139 0.049 Seven-year note 99-180/256 4.0491 0.043 10-year note 90-52/256 3.9668 0.028 20-year bond 87-40/256 4.3491 0.021 30-year bond 81-72/256 4.0928 -0.001 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap spread 37.50 2.75 U.S. 3-year dollar swap spread 14.25 2.25 U.S. 5-year dollar swap spread 6.25 2.25 U.S. 10-year dollar swap spread 3.00 2.75 U.S. 30-year dollar swap spread -47.00 2.25 (Reporting by Herbert Lash; editing by Jonathan Oatis)