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TREASURIES-Yields rise as stocks rally but recession fears linger

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(Updates throughout, adds details, updates prices) By Davide Barbuscia NEW YORK, June 21 (Reuters) - U.S. Treasury yields rose on Tuesday as the risk-off mode which weighed on U.S. markets last week took a pause, lifting stocks as investors returned from a long holiday weekend. U.S. government bond yields had declined on Friday after a volatile week in which they hit more than 10-year highs on expectations of aggressive interest rate hikes, and then fell on concerns about how these will affect growth. Major Wall Street indexes fell for the third week in a row last week amid heightened volatility after the U.S. Federal Reserve's largest rate increase since 1994, but they climbed in a bear market rally on Tuesday. "It feels like investors are selling Treasuries to pivot back into equities following a brutal sell-off over the past few weeks," said Steven Schweitzer, senior fixed-income portfolio manager with the Swarthmore Group. Tuesday's gains in the S&P 500, however, were likely to be short-lived, Capital Economics said, as the Fed’s tightening cycle still had a long way to go and because of expectations the U.S. economy would weaken. Data on Tuesday showed that U.S. existing home sales tumbled to a two-year low in May, a sign that the housing market is losing speed amid high prices and rising mortgage rates. Expectations of more big moves by the U.S. central bank as it seeks to counter inflation were also pushing yields up, with Fed funds futures traders on Tuesday pricing in an 85% chance of another 75 basis points hike in July. "My hunch is that traders are now inking in, as opposed to just penciling in, another 75 basis points rate (increase) in July," said Schweitzer. Richmond Federal Reserve President Thomas Barkin said on Tuesday that an interest rate increase of 50 or 75 basis points at the U.S. central bank's next policy meeting in July seemed reasonable. Two-year Treasury yields, which are highly sensitive to interest rate moves, rose to 3.194% on Tuesday, from 3.166% on Friday. Benchmark 10-year yields climbed to 3.303% from their 3.239% close at the end of last week. The long end of the U.S. yield curve, however, could change course as investors continue to be cautious due to increasing concerns there will be a sharp economic slowdown. Goldman Sachs now sees a 30% chance that the U.S. economy will tip into a recession over the next year, up from its previous forecast of 15%. U.S. investment firm PIMCO said on Tuesday the outlook for bonds could improve due to rising recessionary concerns and after a sell-off that has hammered valuations. A Fed determined to hike rates aggressively to fight inflation implies flatter yield curves, more recessionary fears and lower yields for longer-term Treasury debt, strategists at NatWest Markets said. "However, the volatility in markets is too much to have a strong directional view in the very near term," they said in a note. The closely watched yield curve between two-year and 10-year notes climbed to 10.8 basis points on Tuesday, after inverting by 5 basis points last week. An inversion in this part of the curve is seen as a reliable indicator that a recession is likely in one to two years. June 21 Tuesday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 1.5525 1.5799 -0.013 Six-month bills 2.3275 2.387 0.158 Two-year note 98-178/256 3.1984 0.032 Three-year note 98-164/256 3.3579 0.017 Five-year note 96-152/256 3.3792 0.039 Seven-year note 96-14/256 3.3926 0.056 10-year note 96-96/256 3.3073 0.068 20-year bond 94-128/256 3.6408 0.096 30-year bond 90-92/256 3.3904 0.096 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 40.00 -2.25 spread U.S. 3-year dollar swap 16.75 -1.00 spread U.S. 5-year dollar swap 3.75 -0.25 spread U.S. 10-year dollar swap 6.50 0.25 spread U.S. 30-year dollar swap -27.50 0.75 spread (Reporting by Davide Barbuscia: editing by Jonathan Oatis)