TREASURIES-U.S. Treasuries rally as market anticipates Fed pivot

    (Company corrects Caron's title in paragraph 9)
    By Herbert Lash
       NEW YORK, Jan 9 (Reuters) - Treasury prices rallied
further on Monday on expectations of a halt to rising interest
rates, although the market faces a hawkish U.S. Federal Reserve
that aims to see inflation truly slowing before it can pivot.
    Fed Chair Jerome Powell could insist when he speaks on
Tuesday that more time is needed to show inflation is under
control. But consumer price data on Thursday could bolster the
market's view that inflation is on track towards the Fed's 2%
target.
    Data on Friday showed U.S. services activity contracted for
the first time in more than 2-1/2 years in December, which gave
both bonds and equities the green light to rally after labor
market data showed wage growth rose less than expected.
    "It's a tug of war between the markets not believing the Fed
can tighten policy and stay there for an extended period of time
versus expectations of weakening inflation and weaker economic
data allowing the Fed to ease at some point later this year,"
said Andrzej Skiba, head of the BlueBay U.S. fixed income team
at RBC Global Asset Management in New York.
    But markets may have moved too quickly and too far, as the
10-year Treasury's yield is below 3.6% and the Fed indicates the
terminal rate will be above 5% this year, Skiba said.
    "You could argue that quite a lot of good news on that front
has been priced in," he said.
    The yield on 10-year Treasury notes fell 4.4
basis points to 3.527%, and the two-year's yield,
which often reflects interest rate expectations, fell 4.8 basis
points to 4.212%. Yields trade inversely to their price.
    A closely watched part of the U.S. Treasury yield curve
measuring the gap between yields on three-month bills and the
benchmark 10-year note inverted further to a
record -136.10 and was last at -109.5 basis points.
    The Fed is determined to tame inflation but signs of a
weakening jobs market could make it hard for the U.S. central
bank to stay the course, said Jim Caron, co-chief investment
officer of the global risk balanced control team at Morgan
Stanley Investment Management in New York.
    "They need to kill inflation. They need to make sure it gets
to target and stays anchored at target levels," Caron said.
    But the political narrative for the Fed will be difficult as
Main Street starts to feel the pain of a slowing economy.
    "Despite all the layoffs we're hearing about in Corporate
America, people are finding jobs but they're finding lesser
quality, lower-paying jobs," he said. "That's a very important
caveat that I don't think the markets are really focusing on."
    The Treasury will sell $90 billion of debt this week,
starting with $40 billion of three-year notes on Tuesday. On
Wednesday $32 billion of 10-year notes will be sold, and on
Thursday $18 billion of 30-year bonds.
    The yield on the 30-year Treasury bond was down
2.6 basis points to 3.666%.
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.248%.
    The 10-year TIPS breakeven rate was last at
2.232%, indicating the market sees inflation averaging about
2.2% a year for the next decade.
    The U.S. dollar 5 years forward inflation-linked swap
, seen by some as a better gauge of inflation
expectations due to possible distortions caused by the Fed's
quantitative easing, was last at 2.419%.
         Jan. 9 Monday 1 p.m. New York / 1700 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             4.5075       4.6199    -0.006
 Six-month bills                               4.69         4.8674    0.036
 Two-year note                                 100-18/256   4.2119    -0.048
 Three-year note                               100-38/256   3.945     -0.046
 Five-year note                                100-246/256  3.6617    -0.052
 Seven-year note                               101-180/256  3.5965    -0.054
 10-year note                                  104-240/256  3.5266    -0.044
 20-year bond                                  102-104/256  3.8256    -0.035
 30-year bond                                  106-8/256    3.6657    -0.026

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 29.00        -0.50
 U.S. 3-year dollar swap spread                 10.75         0.25
 U.S. 5-year dollar swap spread                  0.75         0.00
 U.S. 10-year dollar swap spread                -6.25        -0.25
 U.S. 30-year dollar swap spread               -46.50        -0.25


 (Reporting by Herbert Lash; Editing by Lisa Shumaker)