TREASURIES-Yields tumble after Fed's dovish hike amid talk of a pause

(Adds data, aution calendar, 10-year TIPS auction results, updates prices) By Karen Brettell NEW YORK, March 23 (Reuters) - U.S. Treasury yields dropped on Thursday, a day after the Federal Reserve hiked rates by 25 basis points but indicated that it is on the verge of pausing further increases after the recent collapse of two U.S. banks. Fed Chair Jerome Powell sought to reassure investors on Wednesday about the soundness of the banking system, saying that the management of Silicon Valley Bank "failed badly," but that the bank's collapse did not indicate wider weakness in the banking system. Powell said that officials were still intent on fighting inflation while also eying the extent to which recent bank failures had cooled demand and slowed lending. “They basically tried to thread the needle yesterday between the need to hike rates to bring inflation down and really committing to stabilizing the banking sector,” said Gennadiy Goldberg, interest rate strategist at TD Securities in New York. Investors expect Fed policy to be largely data dependent, with risks from the banking system now also a factor. "Effectively the market is saying - as long as the data’s fine, we continue to watch the banking headlines, but if the data’s not fine, that obviously means that the Fed can’t keep hiking,” Goldberg said. Fed funds futures traders are pricing in a 29% chance that the Fed will hike rates by an additional 25 basis points in May, and 71% odds that they leave the rate unchanged at 4.75% to 5.0%. They also see the Fed cutting rates to 3.96% by December. Data on Thursday showed that the number of Americans filing new claims for unemployment benefits edged down last week, showing no signs yet that the recent financial market turbulence following the failure of two regional banks was having an impact on the economy. Benchmark 10-year note yields fell nine basis points to 3.410% and two-year yields dropped 17 basis points to 3.816%. The inversion in the closely watched yield curve between two-year and 10-year notes narrowed to minus 40 basis points. The Treasury Department saw slightly soft demand for a $15 billion sale of 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday. The debt sold at a high yield of 1.182%. Demand was below its recent average at 2.28 times the amount on offer. The Treasury will sell short-and intermediate-dated debt next week including $42 billion in two-year notes on Monday, $43 billion in five-year notes on Tuesday and $35 billion in seven-year notes on Wednesday. March 23 Thursday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 4.5425 4.6585 -0.060 Six-month bills 4.585 4.7714 -0.132 Two-year note 101-126/256 3.8163 -0.165 Three-year note 102-212/256 3.6136 -0.163 Five-year note 102-154/256 3.4221 -0.153 Seven-year note 103-122/256 3.4321 -0.122 10-year note 100-192/256 3.4098 -0.090 20-year bond 100-200/256 3.8184 -0.039 30-year bond 98-228/256 3.6864 -0.011 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 30.25 -1.50 spread U.S. 3-year dollar swap 18.25 -0.50 spread U.S. 5-year dollar swap 9.50 -0.50 spread U.S. 10-year dollar swap 0.50 -2.00 spread U.S. 30-year dollar swap -45.50 -1.50 spread (Reporting by Karen Brettell; Editing by Kirsten Donovan and Cynthia Osterman)