(Recasts, updates yields, adds bond auction results) By Ross Kerber and Karen Pierog Nov 10 (Reuters) - U.S. Treasury debt yields shot higher on Wednesday as the market was battered by the biggest annual gain in U.S. consumer prices in 31 years and a weak 30-year bond auction. But "real" yields on Treasury Inflation-Protected Securities (TIPS) fell to record lows after the latest consumer price data reinforced inflation concerns and flattened a closely watched part of the yield curve. The yield on 10-year TIPS dipped as low as -1.243% and the yield on 30-year TIPS went as low as -0.608%, both records, in morning trading then drifted higher later in the session. Inflation expectations soared, with the five-year breakeven inflation rate reaching a record-high 3.113% and the 10-year breakeven rate rising to 2.72%, the highest since May 2006. The moves came after higher-than-expected consumer price inflation, which could lead the Federal reserve to tighten monetary policy. A report from the U.S. Labor Department showed prices increased more than expected in October as the cost of gasoline and food surged, leading to the biggest annual gain since 1990. "The market has to do a one-time adjustment on inflation expectations and that's why you get a day like today," said Gary Pzegeo, head of fixed income for CIBC Private Wealth. Meanwhile, the U.S. Treasury's $25 billion auction of 30-year bonds had a poor showing, according to analysts, pushing yields on the long end of the curve to session highs. The bonds were sold with a high yield of 1.940% and below-average demand at a bid-to-cover ratio of 2.20. The benchmark 10-year yield, which jumped as high as 1.592%, was last up 10.4 basis points at 1.5528%. The 30-year yield, which hit 1.988% following the auction, was last 9.7 basis points higher at 1.9177%. The inversion on the longest end of the curve that began late last month continued with the 20-year yield at 1.9636%. On the shorter end of the curve, the two-year yield <US2YT=RR, which typically moves in step with interest rate expectations, was last 7.8 basis points higher at 0.4869%. The five-year yield, which is also sensitive to Fed rate expectations, was up 12.8 basis points at 1.1965%. Jack Ablin, chief investment officer for Cresset Capital in Chicago, said the market moves reflected growing concerns about higher prices. "The inflation came in higher than expected, and bond investors need to be compensated for the purchasing power risk," he said. The moves left parts of the U.S. Treasury yield curve flatter. The gap between yields on five- and 30-year Treasuries fell below 66 basis points for the first time since March 2020 and was last down about 2 basis points from Tuesday's close at 71.10 basis points. BMO Capital Markets interest rate strategist Ben Jeffery said the flattening suggested a more aggressive normalization path by the U.S. central bank. "At this point the flatter curve seems to be pointing to more aggressive Fed action, so I think that's going to be the primary story probably over the next several months or even the next quarter or two," he said. The gap between two-year and 10-year Treasuries was last about 5 basis points steeper at 106.30 basis points. November 10 Wednesday 2:20PM New York / 1920 GMT Price Current Net Yield % Change (bps) Three-month bills 0.05 0.0507 0.005 Six-month bills 0.065 0.0659 0.005 Two-year note 99-200/256 0.4869 0.078 Three-year note 99-206/256 0.816 0.100 Five-year note 99-168/256 1.1965 0.128 Seven-year note 99-156/256 1.4341 0.120 10-year note 98-92/256 1.5528 0.104 20-year bond 96-132/256 1.9636 0.115 30-year bond 101-220/256 1.9177 0.097 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 22.50 1.75 spread U.S. 3-year dollar swap 18.25 1.50 spread U.S. 5-year dollar swap 8.25 -0.25 spread U.S. 10-year dollar swap 3.00 0.25 spread U.S. 30-year dollar swap -18.50 2.25 spread (Reporting by Ross Kerber in Boston and Karen Pierog in Chicago; Editing by Nick Zieminski and Alex Richardson)
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