TREASURIES- Inflation fears, poor bond auction push yields higher

 (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
    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
 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       
 U.S. 2-year dollar swap        22.50         1.75    
 U.S. 3-year dollar swap        18.25         1.50    
 U.S. 5-year dollar swap         8.25        -0.25    
 U.S. 10-year dollar swap        3.00         0.25    
 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)