TREASURIES-Yields edge up before inflation data

(Adds comments from Fed's Williams in 7th paragraph, details on debt ceiling negotiations and market reaction in 10-11 paragraph, results of three-year auction in 12-13 paragraphs, updates prices) By Karen Brettell NEW YORK, May 9 (Reuters) - Treasury yields rose slightly on Tuesday as investors awaited April consumer price inflation data on Wednesday for clues on whether price pressures are continuing to ease. The report is this week's main U.S. economic focus, but investors are also trying to gauge whether the worst of the U.S. regional banking crisis has passed and if Congress will raise the debt ceiling in time to avoid a default. Once the debt ceiling issue and volatility around regional banks are resolved "it might be a cleaner read heading into the June meeting on economic fundamentals and what the Fed will do," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York. "The most likely scenario is that they'll keep policy on hold." Ebbing inflation and concerns over regional banks and the debt ceiling are seen as likely to prompt the Federal Reserve to pause interest rate hikes in June, but a surprise increase in price pressures could disrupt this view. The May inflation report will also be due just before the U.S. central bank's June meeting. Headline consumer prices are expected to have risen at an annual rate of 5.0% in April, with a 5.5% gain in core prices. New York Fed President John Williams said on Tuesday it is

too soon to say whether the U.S. central bank is done raising rates, arguing that if more action is needed policymakers would not hold back.

Fed funds futures traders are pricing in an 83% probability that the Fed will keep rates unchanged in June, and a 17% likelihood of a 25 basis point hike. Benchmark 10-year yields rose almost one basis point to 3.526% and two-year yields were up around one basis point at 4.026%. The yield curve inversion between two-year and 10-year notes was around minus 50 basis points, reflecting concerns about a near-term recession. U.S. President Joe Biden and top Republican lawmakers will declare their positions face to face on raising the $31.4 trillion U.S. debt ceiling on Tuesday. One-month Treasury bills yields traded as high as 5.689% on Tuesday, just below a record 5.739% reached on Friday, as some investors avoid bills that may come due when the government risks running out of funds. The Treasury sold $40 billion in three-year notes on Tuesday to strong demand, the first sale of $96 billion in coupon-bearing supply this week.

The notes sold with a high yield of 3.695%, and the bid-to-cover ratio was 2.93 times, the highest since at least August 2020. The Treasury will also sell $35 billion in 10-year notes on Wednesday and $21 billion in 30-year bonds on Thursday.

May 9 Tuesday 3:04PM New York / 1904 GMT Price Current Net Yield % Change (bps) Three-month bills 5.1275 5.2677 0.014 Six-month bills 4.9475 5.159 0.051 Two-year note 99-183/256 4.0263 0.014 Three-year note 100-16/256 3.7266 0.003 Five-year note 100 3.4998 0.002 Seven-year note 99-252/256 3.5024 0.001 10-year note 99-200/256 3.5262 0.007 20-year bond 99-44/256 3.9353 0.012 30-year bond 96 3.8517 0.018
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 22.00 -1.00
spread
U.S. 3-year dollar swap 14.25 0.00
spread
U.S. 5-year dollar swap 8.75 -0.25
spread
U.S. 10-year dollar swap 0.25 -0.75
spread
U.S. 30-year dollar swap -43.75 -0.25
spread

(Reporting by Karen Brettell; editing by Barbara Lewis and Richard Chang)