TREASURIES-Yields rise after weak Thursday auction

By Matt Tracy Feb 10 (Reuters) - U.S. Treasury yields rose to start Friday's session, buoyed by a Thursday auction of 30-year bonds that saw weak demand and investor concerns over the direction of inflation. The 30-year bonds, the last of $96 billion in coupon-bearing supply auctioned this week, sold at a high yield of 3.686%. This is around 3 basis points higher than where they traded prior to the auction. The bid-to-cover ratio was 2.25 times, the lowest since December. Demand for government debt has been mixed this week, after similarly weak demand for a $40 billion sale of three-year notes on Tuesday and strong demand for a $35 billion sale of 10-year notes on Wednesday. "The economic situation has definitely improved, and this week we didn't really have many data releases to contradict last week's tremendous jobs report," said Michael Lorizio, senior fixed income trader at Manulife Investment Management. "So I think it created a more difficult environment for new issuance this week." Yields jumped last Friday after the U.S. Labor Department reported 517,000 new jobs in January, prompting investors to recalibrate for a higher peak federal funds rate from the Federal Reserve than the 5.00%-5.25% previously expected. But yields fell slightly on Thursday after investors digested jobless claims numbers, which came in slightly higher than economists' forecasts but remained at levels consistent with a tight labor market. The next major economic datapoint likely to influence Fed policy will come next week in the form of January's consumer price inflation data. Also next week, the U.S. Census Bureau will release its January retail trade data, which could also sway Fed policy. "I think that's probably underrated in terms of its significance, because I think that's the first real big piece of data to help start making a prediction as far as what Q1 GDP growth will be," said Lorizio. Benchmark 10-year yields rose as high as 3.717%, the highest since Jan. 6, and are up from a low of 3.333% on Thursday before the data. Two-year yields reached 4.525%, the highest since Nov. 30. The 10-year yields have fallen from a 15-year high of 4.338% on Oct. 21 on expectations that Fed tightening will lead to a recession this year. Yields also rose on increased concerns about inflation after Russian Deputy Prime Minister Alexander Novak said on Friday that Russia will cut oil production by 500,000 barrels per day, or around 5% of output.

Investors are pricing in expectations for higher inflation as the jobs market remains strong. Breakeven rates on five-year Treasury Inflation-Protected Securities were at 2.50% on Friday, or 2.50% per annum for five-years, up from 2.33% on Feb. 2, before the jobs data, and from 2.13% on Jan. 18.

February 10 Friday 10:22AM New York / 1522 GMT Price Current Net Yield % Change (bps) Three-month bills 4.64 4.7578 0.017 Six-month bills 4.7475 4.9291 0.001 Two-year note 99-80/256 4.4938 -0.015 Three-year note 99-130/256 4.1763 -0.003 Five-year note 98-62/256 3.8926 0.012 Seven-year note 98-20/256 3.8167 0.014 10-year note 98-88/256 3.6997 0.017 20-year bond 101-20/256 3.9207 0.024 30-year bond 97-56/256 3.7808 0.026
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 29.75 1.75
spread
U.S. 3-year dollar swap 17.25 0.00
spread
U.S. 5-year dollar swap 4.25 -0.50
spread
U.S. 10-year dollar swap -2.75 -1.25
spread
U.S. 30-year dollar swap -39.00 -1.75
spread

(Reporting by Matt Tracy, Additional reporting by Karen Brettell; Editing by Sharon Singleton)

Karen.Brettell@thomsonreuters.com))