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TREASURIES-U.S. yield curve extends inversion as 100-bps rate hike bets mount

    * Fed fund futures price in 100 bps rate hike
    * Other yield curves invert as well
    * Recession signals by curve inversion no reliable -analyst
    * Fed's Waller says he backs a 75-bps hike this month

 (Adds new comment, Treasuries table, bylines, bullets, updates
prices)
    By Gertrude Chavez-Dreyfuss and Saikat Chatterjee
    NEW YORK/LONDON, July 14 (Reuters) - A closely watched part
of the U.S. Treasury yield curve on Thursday inverted to its
lowest in more than two decades, as investors priced in a full
percentage point interest rate hike by the Federal Reserve up
following red-hot U.S. inflation data.
    The inversion on the U.S. two-year/10-year yield curve
 advanced further on Thursday to as much as 27.6 
basis points (bps), the most since September 2000, Refinitiv
data showed.
    Curve inversions typically precede recessions. The 2/10
inversions preceded the last eight recessions, including 10 of
the last 13, analysts said.
    That said, Jim Vogel, senior rate strategist, at FHN
Financial in Memphis, Tennessee pointed out that recession
warnings signalled by the yield curve may not be reliable.
    "The Fed's inflation fight is the dominant curve feature and
most of the time when the Fed tightens, it is fighting inflation
in a very strong economy. And here we have high inflation and a
sideways economy," Vogel said.
    "In that kind of environment, if you knew that coming in,
that's an unusual pattern so all the previous history that the
Fed tightens and the curve inverts and the inversion is a
preview to recession may or may not apply," he added.
    Expectations that the Fed would hike by 100 bps at its July
26-27 meeting, more than the 75 bps priced in on Tuesday, came
after a report showing the annual U.S. inflation rate hitting a
more than 40-year peak in June.
    U.S. fed funds futures on Thursday priced in an 86% 
chance of a 100-bps hike at the Fed meeting later this month 
compared to around 7% on Tuesday before the inflation data,
according to CME's FedWatch.
    Refinitiv's FedWatch, on the other hand, showed a lower
probability, but still more than 50%.
    Fed Governor Christopher Waller said though on Thursday he
supports another 75-bps rate increase at the Fed meeting later
this month, but would lean toward a larger hike if incoming data
shows demand is not slowing fast enough to bring inflation down.

    Also on Thursday, other parts of the U.S. yield curve
inverted as well: the 2/5, 2/30, 5/10, and 5/30.
    Another key yield curve, the three-month/10-year flattened
again on Thursday to 43.82 bps, the narrowest gap
in a year, after steepening for most of this year.
    In late morning trading, yields on 10-year benchmark U.S.
debt rose 6.5 bps to 2.974%, while yields on
two-year debt, which are sensitive rate expectations,
rose 7.7 bps to 3.217         
    Atlanta Federal Reserve Bank President Raphael Bostic on
Wednesday boosted expectations for the Fed to act more
hawkishly, saying that higher-than-expected June inflation might
require policymakers to consider a 100 basis point increase at
their meeting later this month.
    
      July 14 Thursday 11:08AM New York / 1508 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.4225       2.4711    0.095
 Six-month bills               2.8875       2.9707    0.026
 Two-year note                 99-159/256   3.2006    0.057
 Three-year note               99-104/256   3.2092    0.069
 Five-year note                100-176/256  3.0992    0.080
 Seven-year note               101-20/256   3.0766    0.079
 10-year note                  99-48/256    2.9706    0.065
 20-year bond                  98-80/256    3.3671    0.026
 30-year bond                  95-172/256   3.0982    0.030
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        27.50         4.75    
 spread                                               
 U.S. 3-year dollar swap         7.00         3.50    
 spread                                               
 U.S. 5-year dollar swap         0.00         1.00    
 spread                                               
 U.S. 10-year dollar swap        7.75         0.50    
 spread                                               
 U.S. 30-year dollar swap      -26.00        -1.00    
 spread (Reporting by Gertrude Chavez-Dreyfuss in New York and Saikat
Chatterjee in London; Editing by Simon Cameron-Moore and Richard
Chang)
  
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