TREASURIES-U.S. yields edge higher amid retail earnings, diverging indicators

 (Adds details, updates prices)
    By Davide Barbuscia
    NEW YORK, Aug 16 (Reuters) - U.S. Treasury yields edged
higher on Tuesday on the back of encouraging data from American
retail giants, which suggested the Federal Reserve has room to
further tighten financial conditions as it battles
four-decade-high inflation.
    Top U.S. retailer Walmart nudged up its annual
profit forecast on Tuesday, while Home Depot surpassed
estimates for quarterly sales.
    "I think there's an element of positivity out there from the
Walmart numbers," said Padhraic Garvey, global head of debt and
rates strategy at ING Americas.
    "I think there's a feeling that this economy has got a bit
of gas to it still, and while that's a good thing what it means
is that the Fed has got a job to do," he said.
    Benchmark 10-year Treasury yields rose to 2.822%
from 2.791% on Monday, while two-year note yields
climbed to 3.249% from 3.203%.    
    The U.S. central bank has raised its benchmark overnight
interest rate by 225 basis points since March and is expected to
raise its policy rate by another 50 or 75 basis points at its
next meeting on Sept. 20-21.
    The rapid tightening of financial conditions, however, has
led investors to weigh inflation concerns against recessionary
fears, with markets oscillating between the two narratives.
    Data last week signaled a possible peak in inflation, and a
report from the Commerce Department on Tuesday showed U.S.
homebuilding fell to the lowest level in nearly 1-1/2 years in
July, weighed down by higher mortgage rates and prices for
construction materials.
    But while housing is struggling, production at U.S.
factories increased more than expected in July, according to a
report from the Federal Reserve on Tuesday, despite the high
interest rate environment.
    "The 0.6% month on month rise in industrial production in
July was much stronger than we expected and provides another
clear sign that the economy is still in expansionary territory,"
Capital Economics said in a note.
    But it added that weaker homebuilding last month "highlights
that Fed tightening is already taking a much greater toll on
some sectors of the economy." 
    For Garvey at ING, weaker housing data was not enough to
suggest a slowdown in the Fed's tightening path.
    "The Fed is far from done, and if that's true we're going to
go through a period where bond yields are under rising
pressure," he added.
    Fed funds futures traders on Tuesday were pricing in a 59.5%
chance of a 50-basis-point hike in September and a 40.5% chance
of a 75-basis-point increase, unchanged from Monday. They expect
the fed funds rate to peak at 3.65% in March.            
    The closely watched yield curve between two- and 10-year
notes - viewed as a reliable indicator that a
recession will follow in 12 to 18 months - was at minus 43.1
basis points on Tuesday. It reached minus 56 basis points on
Wednesday last week, the deepest inversion since 2000.
      August 16 Tuesday 3:00PM New York / 1900 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.6075       2.6614    -0.003
 Six-month bills               3.0275       3.1173    0.010
 Two-year note                 99-136/256   3.249     0.046
 Three-year note               99-208/256   3.1911    0.058
 Five-year note                99-14/256    2.9564    0.043
 Seven-year note               98-68/256    2.9021    0.038
 10-year note                  99-96/256    2.8222    0.031
 20-year bond                  99-4/256     3.3181    0.006
 30-year bond                  97-208/256   3.1127    0.016
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        29.75        -0.50    
 U.S. 3-year dollar swap        11.00        -0.75    
 U.S. 5-year dollar swap         3.00        -0.25    
 U.S. 10-year dollar swap        4.00         0.50    
 U.S. 30-year dollar swap      -32.25         0.50    
 spread (Reporting by Davide Barbuscia; Editing by Paul Simao and Ken