January 12, 2018 / 8:09 PM / a year ago

TREASURIES-U.S. yields up on inflation, 2-year highest since 2008 crisis

    * Consumer price inflation highest in 11 months
    * Two-year yields hit highest since 2008
    * U.S. retail sales rose in December, November's revised

    By Kate Duguid
    NEW YORK, Jan 12 (Reuters) - Treasury yields climbed on
Friday as underlying U.S. consumer prices rose the most in 11
months in December, bolstering expectations of a pickup in
domestic inflation and Federal Reserve interest rate hikes this
    The two-year yield, which is sensitive to
traders' views on interest rates, rose to more than 2 percent
for the first time since the financial crisis.
    "This probably does heighten the chances of, at least
incrementally, a move in March at the first meeting Powell will
chair," said Lou Brien, market strategist at DRW Trading in
Chicago, referring to incoming Federal Reserve Chair Jerome
    The U.S. Senate Banking Committee will hold a second vote on
Jan. 17 on President Donald Trump's nomination of Powell to lead
the central bank.
    The U.S. Labor Department said its Consumer Price Index,
excluding the volatile food and energy components, rose 0.3
percent last month, amid strong gains in the cost of rental
accommodations and healthcare.
    In the past year, inflation has remained stubbornly lower
than the Fed's target rate of 2 percent, despite strong gross
domestic product growth and employment data.
    In a separate report on Friday, the U.S. Commerce Department
said retail sales rose in December and it revised sales growth
in November higher, suggesting the economy exited 2017 with
strong momentum.
    Euro zone bond yields were lower at midday on Friday, with
German yields pulling back from five-month peaks after the
European Central Bank's Jens Weidmann played down the risk of an
imminent rate hike. The yield of U.S. benchmark bonds fell in
step with Europe, but remained above Thursday's close.

    In U.S. government news, Treasury Secretary Steven Mnuchin
said on Friday he believed the Republican tax cuts will
ultimately become revenue neutral over 10 years because of 
higher growth but that the Treasury will likely ask Congress for
more money to implement the tax plan.
    Next week's schedule for data releases is light, so the
market will likely focus on Washington. As the continuing
resolution expires Friday, investors will be watching Congress
to see if it can put together a funding bill in time to avoid a
government shutdown. 
    At 2:13 p.m. (1913 GMT), the yield on 10-year government
notes was 2.554 percent, up from 2.531 percent at
Thursday's close. The yield on two-year government bills hit a
high of 2.026 percent, its highest since September 2008, before
falling slightly to 2.002 percent at 2:13 p.m. EST. 
    Friday, Jan. 12 at 1434 EST (1934 GMT):
 US T BONDS MAR8               150-12/32    -0-2/32    
 10YR TNotes MAR8              122-236/256  -0-52/256  
                               Price        Current    Net
                                            Yield      Change
                                            (pct)      (bps)
 Three-month bills             1.42         1.4446     0.008
 Six-month bills               1.5675       1.6016     0.013
 Two-year note                 99-194/256   2.0017     0.029
 Three-year note               99-170/256   2.1162     0.030
 Five-year note                98-246/256   2.3482     0.034
 Seven-year note               98-136/256   2.4811     0.027
 10-year note                  97-96/256    2.5535     0.023
 30-year bond                  97-204/256   2.8602     -0.003
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
 U.S. 2-year dollar swap        19.00         0.50     
 U.S. 3-year dollar swap        18.00         1.00     
 U.S. 5-year dollar swap         4.50         0.25     
 U.S. 10-year dollar swap       -1.00         0.25     
 U.S. 30-year dollar swap      -19.75         1.25     

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