TREASURIES-Yields rise on higher inflation, rate hike speculation
* Yields rise as inflation expectations pick up * Intermediate-dated notes weaken on rate hike speculation * Fed buys $4.93 billion notes due 2018 and 2019 * Fed says economy expanded at moderate pace through end of 2013 By Karen Brettell NEW YORK, Jan 15 (Reuters) - U.S. Treasuries yields rose on Wednesday after U.S. producer prices recorded their largest increase in six months in December, raising expectations that inflation may start picking up and potentially bringing forward the timeline in which the Federal Reserve will start raising interest rates. The Labor Department said on Wednesday its seasonally adjusted producer price index rose 0.4 percent last month, the biggest rise since June, after slipping 0.1 percent in November. The rise in prices received by the nation's farms, factories and refineries ended two straight months of declines and matched economists' expectations. "There were some early hints of inflationary pressures; recently there has been a sense that inflation might have bottomed," said Boris Rjavinski, an interest rate strategist at UBS in Stamford, Connecticut. Intermediate-dated debt, which is the most sensitive to Fed interest rate policy, was among the worst performers on Wednesday as traders and investors tried to evaluate when the Fed is likely to increase benchmark rates from rock-bottom levels. Some traders think the Fed could move in mid-2015 while others see a hike as unlikely until at least 2016. "The selloff is led by relatively shorter-term maturities. That kind of reaction means it's not about tapering, but if inflationary pressures are building, what does that mean for the timing of the first hike from the Fed?" Rjavinski said. Five-year notes were last down 4/32 in price to yield 1.676 percent, after rising as high as 1.700 percent, and up from 1.647 percent late on Tuesday. Benchmark 10-year notes fell 3/32 in price to yield 2.886 percent, up from 2.869 percent late on Tuesday. Thirty-year bonds dropped 3/32 in price to yield 3.810 percent, up from 3.800 percent. While the Fed has indicated that it is likely to continue paring bond purchases, some see an interest rate hike as still a long way off. New Fed Chair Janet Yellen may be more focused on the risks of disinflation or deflation as levels continue to run well below the Fed's 2 percent target. "Inflation as opposed to the labor market is going to be the thing on which Fed policy hinges, ... it's one of the transitions going on," said Lou Brien, market strategist at DRW Trading in Chicago. Consumer price data on Thursday will be closely watched for signs of increasing price pressures. Chicago Federal Reserve Bank president Charles Evans, one of the Fed's most dovish policymakers, told reporters on Wednesday he expects the U.S. central bank to continue to taper its massive bond buying at a measured pace of perhaps $10 billion at each meeting unless data comes in unexpectedly weak. The U.S. economy continued to grow at a moderate pace from late November through the end of 2013, with some regions expecting a pick-up in growth, the Fed said on Wednesday in its Beige Book report of anecdotal information on business activity collected from contacts nationwide. Atlanta Fed President Dennis Lockhart is due to speak later on Wednesday. The Fed bought $4.93 billion in notes due 2018 and 2019 on Wednesday as part of its ongoing purchase program. It will purchase between $1 billion and $1.50 billion in bonds due 2036 and 2043 on Thursday.