TREASURIES-Yields dip as inflation remains in focus

 (Adds data, comments from Fed's Barkin, updates prices)
    By Karen Brettell
    NEW YORK, Aug 12 (Reuters) - Longer-dated U.S. Treasury
yields dipped on Friday after a volatile week as investors
evaluated whether an apparent slowdown in inflation could reduce
the speed of Federal Reserve interest rate hikes.
    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, and increased
by a weaker-than-expected 8.5% for the year.

    The data has prompted some hopes that the worst of inflation
increases may be in the rear view mirror. Still, many analysts
and investors say that more proof will be needed before it can
be determined how Fed policy could be affected.
    "The theme here is that if indeed the monthly inflation
prints are a little more stable we'll need fewer rate hikes and
then long-term inflation's unlikely to come down quite as far,"
said Guy LeBas, chief fixed-income strategist at Janney
Montgomery Scott in Philadelphia. 
    However, "I would maintain skepticism until we at least see
one or two more inflation prints that signal that rate hikes are
ready to slow," LeBas said.
    Yields briefly bounced after data on Friday showed that U.S.
consumer sentiment ticked further up in August from a record low
earlier this summer and American households' near-term inflation
outlook eased again on the back of the sharp drop in gasoline
    A separate report showed that U.S. import prices fell for
the first time in seven months in July, helped by a strong
dollar and lower fuel and nonfuel costs.
    Low liquidity has added to market volatility with many
traders out for summer holidays, and as some investors are wary
to take positions until there is more clarity on the outlook.
    Benchmark 10-year note yields dipped four basis
points to 2.849%, after reaching 2.902% on Thursday, the highest
since July 22. Two-year note yields gained two basis
points to 3.251%.
    The closely watched yield curve between two- and 10-year
notes was at minus 41 basis points, 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
    Investors are debating whether the Fed will hike rates by 50
basis points or 75 basis points when it meets in September.
    Fed funds futures traders are now pricing in a 58% chance of
a 50-basis-point hike and a 42% chance of a 75-basis-point
    The fed funds rate is expected to rise to 3.66% by March,
from 2.33% now.
    Richmond Fed President Thomas Barkin said on Friday he
wanted to raise interest rates further to bring inflation under
control, and would watch U.S. economic data to decide how big a
rate hike to support at the Fed's next meeting in September.

    San Francisco Fed President Mary Daly said on Thursday that
while a half-percentage-point interest rate hike in September
"makes sense", she was open to the possibility of a bigger hike
to fight too-high inflation.
      August 12 Friday 2:50PM New York / 1850 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.51         2.5604    0.002
 Six-month bills               2.97         3.0561    0.012
 Two-year note                 99-135/256   3.2505    0.021
 Three-year note               99-208/256   3.191     0.014
 Five-year note                98-248/256   2.975     -0.013
 Seven-year note               98-32/256    2.9246    -0.026
 10-year note                  99-36/256    2.8494    -0.039
 20-year bond                  98-200/256   3.3345    -0.059
 30-year bond                  97-196/256   3.1152    -0.044
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        30.50         1.25    
 U.S. 3-year dollar swap        12.00         1.00    
 U.S. 5-year dollar swap         4.25         0.25    
 U.S. 10-year dollar swap        4.75        -0.25    
 U.S. 30-year dollar swap      -31.25         0.25    
 spread (Editing by David Evans)