TREASURIES-Yields rise as investors focus on further rate hikes

 (Recasts with yield move; adds quote, results of 30-year
auction, updates prices)
    By Karen Brettell
    NEW YORK, Aug 11 (Reuters) - Benchmark U.S. Treasury yields
hit a more than two-week high on Thursday as investors bet the
U.S. Federal Reserve will press on hiking rates as inflation
remains high, even though price pressures are showing signs of
    Data on Thursday showed U.S. producer prices unexpectedly
fell in July. It came a day after news that the Consumer Price
Index (CPI) for July was unchanged on the month, but up at an
annual rate of 8.5%.
    "Even if they're seeing slowing inflation and a slowing of
the economy, they will still hike rates. Why? Because inflation
still has an 8% handle on it. It's still far too high," said
Padhraic Garvey, regional head of research, Americas at ING.
    Markets have been whipsawed as expectations change on
whether the U.S. central bank is likely to raise rates by 50
basis points or 75 basis points at its September meeting.
    The odds of a 75 basis points hike dropped on Wednesday
following U.S. consumer price data. They had increased after
Friday's jobs report for July showed U.S. job growth had
unexpectedly accelerated.
    Fed funds futures traders are now pricing in a 58% chance of
a 50-basis-point hike in September and a 42% chance of a
75-basis-point increase.
    The fed funds rate is expected to rise to 3.65% by March,
from 2.33% now.
    The Fed may want to raise rates another 75 basis points as
it would be more difficult to hike once the economy slows, said
Tom di Galoma, managing director at Seaport Global Holdings,
noting that inflation remains "quite high."
    "I think the Fed wants to increase rates as quickly as they
can so they can lower them once the slowdown takes place," di
Galoma said. "The yield curve doesn't invert like this unless
there is going to be a fairly broad recession coming."
    Concerns that the Fed's tightening will spark an economic
slowdown have sent yields on longer-dated debt below those on
shorter-dated notes.
    The closely watched yield curve between two- and 10-year
notes was at minus 35 basis points on Thursday,
after reaching minus 56 basis points on Wednesday, the deepest
inversion since 2000.
    An inversion in this part of the yield curve is viewed as a
reliable indicator that a recession will follow in 12-to-18
    Benchmark 10-year note yields reached 2.902% on
Thursday, the highest since July 22. Two-year note yields
 rose two basis points to 3.229%.
    Long-dated yields also rose on Thursday on soft demand for a
$21 billion sale of new 30-year bonds, the final sale of $98
billion in new coupon-bearing supply this week.
    The bonds sold at a high yield of 3.106%, more than a basis
point higher than before the auction. Demand was 2.31 times the
debt on offer, the weakest ratio since April.

    The 30-year bond yields rose to 3.189% in the
secondary market, the highest since July 21.
    Demand was solid for a $35 billion sale of 10-year notes on
Wednesday and a $42 billion sale of three-year notes on Tuesday.
    August 11 Thursday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.5075       2.5584    -0.039
 Six-month bills               2.9575       3.0438    -0.011
 Two-year note                 99-145/256   3.2289    0.015
 Three-year note               99-218/256   3.1773    0.030
 Five-year note                98-234/256   2.9867    0.065
 Seven-year note               97-248/256   2.9496    0.090
 10-year note                  98-212/256   2.8857    0.105
 20-year bond                  97-240/256   3.3939    0.115
 30-year bond                  94-76/256    3.1724    0.130
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        29.25         2.25    
 U.S. 3-year dollar swap        11.00         1.50    
 U.S. 5-year dollar swap         4.00         0.75    
 U.S. 10-year dollar swap        5.00         0.50    
 U.S. 30-year dollar swap      -31.50        -0.25    
 spread (Reporting by Karen Brettell; Editing by Susan Fenton and
Richard Chang)