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TREASURIES-Yields rise before supply, inflation data in focus

·3 min read

(Adds inflation expectations, context, updates prices) By Karen Brettell NEW YORK, June 6 (Reuters) - U.S. Treasury yields rose to 3-1/2-week highs on Monday before the United States Treasury will this week issue new supply and with data on Friday expected to show still high inflation. The U.S. Treasury will sell $96 billion in debt, including $44 billion in three-year notes on Tuesday, $33 billion in 10-year notes on Wednesday and $19 billion in 30-year bonds on Thursday. That is likely to push yields higher as banks and investors prepare to absorb the issuance. “The move towards higher yields is consistent with new supply coming what you would expect for preparation for the in, especially in the long-end,” said Thomas Simons, a money market economist at Jefferies in New York. Benchmark 10-year note yields rose eight basis points to 3.038%. Two-year yields gained seven basis points to 2.734%. Inflation expectations also increased, with breakeven rates on five-year Treasury Inflation-Protected Securities (TIPS) , a measure of expected average annual inflation for the next five years, rising to 3.07%. They are up from a three-month low of 2.86% on May 24. Friday's inflation data could boost expectations that the Federal Reserve will continue to aggressively hike rates as it tries to bring down price pressures that are rising at the fastest pace in 40 years. Ten-year Treasury yields fell from 3-1/2-year highs of 3.203% reached on May 9 as investors worried that the Fed’s tightening will dent growth and risk tipping the U.S. economy into recession. That also raised the prospect that the U.S. central bank could pause rate increases in September. But yields moved back higher last week as Fed officials including Vice Chair Lael Brainard played down the likelihood of a pause and expressed concern that inflation will remain stubbornly high. “The September pause camp has already lost a lot of credibility with the way Fed speakers have been addressing it recently, but I think that when we see this (inflation) data it really should put the nail in the coffin,” said Simons. Friday's consumer price index (CPI) is expected to have gained 0.7% in May, compared with 0.3% in April, with annual inflation unchanged at 8.3%, according to the median estimate of economists polled by Reuters. The Fed is expected to raise rates by 50 basis points at each of its June and July meetings, with an additional 50 basis point increase also possible in September. Fed fund futures traders expect the Fed’s benchmark rate to rise to 3.19% in March, from 0.83% now. June 6 Monday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 1.1875 1.2074 0.022 Six-month bills 1.6525 1.6892 0.033 Two-year note 99-141/256 2.7343 0.067 Three-year note 99-120/256 2.9397 0.076 Five-year note 98-30/256 3.0351 0.084 Seven-year note 97-246/256 3.0768 0.087 10-year note 98-156/256 3.038 0.083 20-year bond 97-148/256 3.4184 0.085 30-year bond 93-244/256 3.19 0.077 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 37.00 -0.25 spread U.S. 3-year dollar swap 18.25 0.75 spread U.S. 5-year dollar swap 5.25 0.50 spread U.S. 10-year dollar swap 8.25 0.50 spread U.S. 30-year dollar swap -20.75 1.00 spread (Editing by Nick Zieminski)