(Updates prices, adds comment, table, byline) By Gertrude Chavez-Dreyfuss NEW YORK, Nov 15 (Reuters) - The U.S. Treasury yield curve flattened to a 10-year low on Wednesday after data showed a slight pickup in U.S. inflation, as the market priced in further interest rate hikes from the Federal Reserve next year. The flattening of the yield curve reflects expectations that the Fed will continue to tighten interest rates, pushing yields on the short end higher. At the same time, U.S. inflation, although trending higher, will remain subdued, limiting yields on longer-dated bonds. The gap between U.S. two-year note and U.S. 10-year note yields contracted to 63 basis points, the flattest since November 2007. The difference in five-year and 30-year yields also narrowed to 75 basis points, the flattest in nearly two weeks. U.S. consumer prices, meanwhile, barely rose in October, but rising rents and healthcare costs pointed to a gradual buildup in underlying inflation. "What we saw today was actually good news on inflation: It is normalizing and that is what the Fed wants," said Bruno Braizinha, interest rates strategist, at Societe Generale in New York. Another report showed U.S. retail sales unexpectedly rose 0.2 percent in October, while the data for September was revised to show sales jumping 1.9 percent rather than the previously reported 1.6 percent advance. "This morning's reports will be the last CPI and retail sales reports the Fed will have before heading into their December meeting, and we believe they clear the fairly low bar set by Fed speakers for the FOMC (Federal Open Market Committee) to go ahead with a hike at next month’s meeting," said Michael Feroli, an economist at JP Morgan in New York. In midmorning trading, the 10-year Treasury yield fell to 2.345 percent, from 2.381 percent late on Tuesday. The U.S. two-year yield was at 1.691 percent, unchanged from Tuesday. U.S. 30-year bond yields slid to 2.798 percent, down from Tuesday's 2.839 percent. November 15 Wednesday 10:26AM New York / 1526 GMT Price US T BONDS DEC7 153-24/32 0-28/32 10YR TNotes DEC7 125 0-68/256 Price Current Net Yield % Change (bps) Three-month bills 1.2525 1.2739 0.003 Six-month bills 1.3675 1.3961 0.000 Two-year note 99-162/256 1.6915 0.000 Three-year note 99-218/256 1.8011 -0.011 Five-year note 99-208/256 2.0399 -0.025 Seven-year note 100-44/256 2.2231 -0.034 10-year note 99-44/256 2.3434 -0.038 30-year bond 99-12/256 2.7972 -0.042 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 17.50 -1.00 spread U.S. 3-year dollar swap 17.00 0.00 spread U.S. 5-year dollar swap 5.75 0.00 spread U.S. 10-year dollar swap -1.75 0.25 spread U.S. 30-year dollar swap -24.75 0.25 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Jonathan Oatis)
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