TREASURIES-U.S. yields slide as poor data stir speculation of Fed rate hike pause

(Adds late-day prices, three-month/10-year yield curve inversion) By Herbert Lash NEW YORK, Oct 25 (Reuters) - Treasuries rallied on Tuesday after dismal U.S. data on home prices, consumer confidence and manufacturing fueled market speculation that the Federal Reserve will soon slow its campaign to curb inflation by aggressively raising interest rates. U.S. home prices fell more than expected in August, the S&P CoreLogic Case-Shiller index showed, while two of the Richmond Fed's three components of its manufacturing index notably deteriorated in October. A third report showed a sharp decline in the "present situation" component of the Conference Board's Consumer Confidence index. Yields on the 10-year Treasury note fell sharply to just above 4% after hitting 4.291% on Monday. The 14.5 basis point drop in the 10-year's yield was the largest in three weeks. The two-year notes' yield, which reflect inflation expectations, slid to just under 4.40%, a decline from a 15-year high of 4.639% last week. The data has fed into market speculation that the central bank is examining how to begin to slow its rate hikes, said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco. "The markets are certainly thinking that all of these data are going to cause the Fed to blink, not in November, but later," she said. Fed funds futures are pricing in a 95.7% probability that the Fed will raise rates by 75 basis points when policymakers meet Nov. 1-2, with a 7% chance of a 100 bps hike, CME Group's FedWatch tool shows. Certain consumer prices may be showing a top, but curbing inflation will take longer and be more painful than many believe, said David Petrosinelli, managing director and senior trader at InspereX. "The economy is going to take more than just a soft landing," he said. "The Fed is going to continue to raise rates, even if they slow down, no matter what they telegraph." The yield spread between three-month bills and 10-year notes briefly inverted, falling to -2.10 at one point, Tradeweb data showed. The inversion, when the short-end's yield is higher than the longer-end, is one of the best barometers of a looming recession, Petrosinelli said. The Treasury sold $42 billion of two-year notes at a high yield of 4.460% at auction. The yield on 10-year notes fell 14.7 basis points to 4.085%, and the yield on the 30-year long bonds slid 13.3 basis points to 4.229%. The gap between yields on two- and 10-year Treasury notes , seen as a recession harbinger, was at -39.2 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 2.3 basis points at 4.475%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.626%. The 10-year TIPS breakeven rate was last at 2.506%, indicating the market sees inflation averaging about 2.5% a year for the next decade. The U.S. dollar five 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 2.549%. Oct. 25 Tuesday 3:49 PM New York / 1949 GMT Price Current Net Yield % Change (bps) Three-month bills 3.97 4.0664 -0.023 Six-month bills 4.355 4.5149 -0.032 Two-year note 99-150/256 4.4749 -0.023 Three-year note 99-112/256 4.4538 -0.065 Five-year note 99-116/256 4.2486 -0.108 Seven-year note 98-68/256 4.1654 -0.136 10-year note 89-76/256 4.0854 -0.147 20-year bond 85-232/256 4.4531 -0.145 30-year bond 79-72/256 4.2292 -0.133 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap spread 36.00 -0.50 U.S. 3-year dollar swap spread 12.25 1.75 U.S. 5-year dollar swap spread 5.25 2.25 U.S. 10-year dollar swap spread 2.25 2.00 U.S. 30-year dollar swap spread -48.00 1.75 (Reporting by Herbert Lash; editing by Jonathan Oatis)