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TREASURIES-Yields dip as inflation remains in focus

·4 min read

(Adds data, comments from Fed's Barkin, updates prices) By Karen Brettell NEW YORK, Aug 12 (Reuters) - Longer-dated U.S. Treasury yields dipped on Friday after a volatile week as investors evaluated whether an apparent slowdown in inflation could reduce the speed of Federal Reserve interest rate hikes. Data on Thursday showed U.S. producer prices unexpectedly fell in July. It came a day after news that the Consumer Price Index (CPI) for July was unchanged on the month, and increased by a weaker-than-expected 8.5% for the year. The data has prompted some hopes that the worst of inflation increases may be in the rear view mirror. Still, many analysts and investors say that more proof will be needed before it can be determined how Fed policy could be affected. "The theme here is that if indeed the monthly inflation prints are a little more stable we'll need fewer rate hikes and then long-term inflation's unlikely to come down quite as far," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia. However, "I would maintain skepticism until we at least see one or two more inflation prints that signal that rate hikes are ready to slow," LeBas said. Yields briefly bounced after data on Friday showed that U.S. consumer sentiment ticked further up in August from a record low earlier this summer and American households' near-term inflation outlook eased again on the back of the sharp drop in gasoline prices. A separate report showed that U.S. import prices fell for the first time in seven months in July, helped by a strong dollar and lower fuel and nonfuel costs. Low liquidity has added to market volatility with many traders out for summer holidays, and as some investors are wary to take positions until there is more clarity on the outlook. Benchmark 10-year note yields dipped four basis points to 2.849%, after reaching 2.902% on Thursday, the highest since July 22. Two-year note yields gained two basis points to 3.251%. The closely watched yield curve between two- and 10-year notes was at minus 41 basis points, after reaching minus 56 basis points on Wednesday, the deepest inversion since 2000. An inversion in this part of the yield curve is viewed as a reliable indicator that a recession will follow in 12-to-18 months. Investors are debating whether the Fed will hike rates by 50 basis points or 75 basis points when it meets in September. Fed funds futures traders are now pricing in a 58% chance of a 50-basis-point hike and a 42% chance of a 75-basis-point increase. The fed funds rate is expected to rise to 3.66% by March, from 2.33% now. Richmond Fed President Thomas Barkin said on Friday he wanted to raise interest rates further to bring inflation under control, and would watch U.S. economic data to decide how big a rate hike to support at the Fed's next meeting in September. San Francisco Fed President Mary Daly said on Thursday that while a half-percentage-point interest rate hike in September "makes sense", she was open to the possibility of a bigger hike to fight too-high inflation. August 12 Friday 2:50PM New York / 1850 GMT Price Current Net Yield % Change (bps) Three-month bills 2.51 2.5604 0.002 Six-month bills 2.97 3.0561 0.012 Two-year note 99-135/256 3.2505 0.021 Three-year note 99-208/256 3.191 0.014 Five-year note 98-248/256 2.975 -0.013 Seven-year note 98-32/256 2.9246 -0.026 10-year note 99-36/256 2.8494 -0.039 20-year bond 98-200/256 3.3345 -0.059 30-year bond 97-196/256 3.1152 -0.044 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 30.50 1.25 spread U.S. 3-year dollar swap 12.00 1.00 spread U.S. 5-year dollar swap 4.25 0.25 spread U.S. 10-year dollar swap 4.75 -0.25 spread U.S. 30-year dollar swap -31.25 0.25 spread (Editing by David Evans)