January 12, 2018 / 3:06 PM / a year ago

TREASURIES-U.S. yields climb amid robust inflation, rate hike expectations

    * Inflation data highest in 11 months
    * Two-year yields hit highest since 2008
    * U.S. retail sales rise; core sales revised higher

    By Kate Duguid
    NEW YORK, Jan 12 (Reuters) - Treasury yields climbed on
Friday as underlying U.S. consumer prices posted their biggest
gain in 11 months in December, bolstering expectations about a
pickup in domestic inflation and about Federal Reserve interest
rate hikes this year.
    The two-year yield, which is sensitive to
traders' views on interest rates, jumped over 2 percent to its
highest since September 2008.
    "One of the things that’s been driving the market is an
expectation that inflation may start to pick up or at least
normalize this year and encourage the Fed to continue along its
(monetary policy) tightening path, and today’s data surprised to
the upside," said Michael Pond, head of global inflation-linked
research at Barclays in New York. 
    The Labor Department said its Consumer Price Index,
excluding the volatile food and energy components, rose 0.3
percent last month, amid strong gains in the cost of rental
accommodation and healthcare.
    The suggestion that inflation may be rising also kicked up
the 10-year yield, an indication of the market's
long-term confidence in the economic health of the United
States. In the past year, inflation has remained stubbornly
lower than the Fed's target rate of 2 percent, even amid strong
gross domestic product growth and employment data.
    The yield curve briefly steepened on the data, with the gap
between yields on two-year notes and 10-year notes
 rising to 57 basis points, before falling back to
55 basis points, little changed on the day.
    In a separate report on Friday, the U.S. Commerce Department
said retail sales rose in December as households bought a range
of goods, and figures for the prior month were revised higher,
suggesting the economy exited 2017 with strong momentum.
    The retail data bolsters economists' expectations of an
acceleration in consumer spending in the fourth quarter.
Consumer spending, which accounts for more than two-thirds of
U.S. economic activity, increased at a 2.2 percent annualized
rate in the third quarter.
    At 9:36 a.m. (1336 GMT), the yield on 10-year government
notes was 2.570 percent, up from 2.531 percent at Thursday's
close. The yield on two-year government bills hit a high 2.026
percent, before falling slightly to 2.013 percent at 9:37
a.m.(1437 GMT). 
    January 12 Friday 9:45AM New York / 1445 GMT
 US T BONDS MAR8               150          -0-14/32  
 10YR TNotes MAR8              122-212/256  -0-76/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.4225       1.4472    0.010
 Six-month bills               1.5775       1.6119    0.023
 Two-year note                 99-190/256   2.0099    0.037
 Three-year note               99-164/256   2.1244    0.038
 Five-year note                98-234/256   2.3584    0.044
 Seven-year note               98-116/256   2.4935    0.039
 10-year note                  97-64/256    2.5682    0.037
 30-year bond                  97-104/256   2.8801    0.017
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        19.00         0.50    
 U.S. 3-year dollar swap        17.75         0.75    
 U.S. 5-year dollar swap         4.25         0.00    
 U.S. 10-year dollar swap       -1.00         0.25    
 U.S. 30-year dollar swap      -20.00         1.00    

 (Editing by Bernadette Baum)
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