* McCain backs U.S. Senate tax bill
* U.S. data on Thursday supportive of U.S. yields (Adds details)
By Gertrude Chavez-Dreyfuss
NEW YORK, Nov 30 (Reuters) - U.S. Treasury yields rose sharply on Thursday, in line with the steep rally on Wall Street, on news that Senator John McCain had endorsed the U.S. Senate tax bill, potentially easing challenges to its eventual passage in Congress.
Yields on U.S. 10-year notes surged to five-week peaks, while those on two-year notes hit a fresh nine-year high just shy of 1.8 percent.
Yields on U.S. 30-year Treasuries rose to a two-week high.
However, yields later retraced about half their rise as some market participants doubted the efficacy of the current tax cut proposal and its impact on U.S. growth.
“People (were) waiting for the knee-jerk reaction to go back in and buy Treasuries,” said Aaron Kohli, interest rates strategist at BMO Capital Markets in New York. “The market doesn’t have faith in either the package or the results. Probably both.”
McCain, who was instrumental in defeating the Republican push to overturn the Affordable Care Act earlier this year, said the bill was “far from perfect” but would boost the economy and provide tax relief for all Americans.
The Republican-controlled Senate is expected to begin a potentially chaotic “vote-a-rama” on amendments from Republicans and Democrats before moving to a final vote late on Thursday or early on Friday.
Earlier, U.S. yields got a boost from U.S. data showing a rise in inflation and a decline in jobless claims, reinforcing expectations of an interest rate increase next month and several more in 2018.
The Federal Reserve’s preferred inflation measure, the personal consumption expenditures price index excluding food and energy, rose 0.2 percent in October after a similar gain in September.
“Today’s inflation data was enough to let bond yields drift back up to the highs at the long end of the curve,” said Jim Vogel, interest rates strategist at FTN Financial in Memphis.
The Fed is widely expected to raise rates at next month’s monetary policy meeting and has forecast three more rate hikes next year.
U.S. initial jobless claims data also lifted yields. The report showed jobless claims slipped to a seasonally adjusted 238,000 for the week ended Nov. 25.
The 10-year Treasury yield was up at 2.415 percent, from 2.376 percent late on Wednesday. It hit a five-week high of 2.437 percent earlier in the session.
U.S. two-year note yields hit a nine-year high of 1.798 percent, from 1.762 percent on Wednesday. Two-year notes are the maturity most sensitive to rate hike expectations.
U.S. 30-year bond yields were up at 2.833 percent from Wednesday’s 2.817 percent. Earlier, 30-year yields hit a two-week high of 2.869 percent.
-------MARKET SNAPSHOT AT 4:29 p.m. EDT (2129 GMT)------- June T-Bond 151-24/32 (-14/32) June 10-Year note 124-11/32 (-12/32)
Change vs Current
Nyk yield Three-month bills 1.2425 (-0.03) 1.264 Six-month bills 1.415 (-0.01) 1.445 Two-year note 99-30/32 (-02/32) 1.790 Five-year note 99-11/32 (-08/32) 2.143 10-year note 98-18/32 (-11/32) 2.413 30-year bond 98-12/32 (-10/32) 2.832
LAST Change U.S. 2-year dollar swap spread 18.25 (+0.50) U.S. 3-year dollar swap spread 18.00 (+0.25) U.S. 5-year dollar swap spread 5.75 (-0.50) U.S. 10-year dollar swap spread -0.75 (+0.50) U.S. 30-year dollar swap spread -23.00 (+0.75) (Reporting by Gertrude Chavez-Dreyfuss and Dion Rabouin; Editing by Richard Chang and Chris Reese)