TREASURIES-U.S. yields rise as market awaits consumer price data

    (Adds three-year auction, comment, fresh prices)
    By Herbert Lash
       NEW YORK, Jan 10 (Reuters) - Treasury yields rose on
Tuesday as the market braced for highly anticipated consumer
price data later this week that could influence how high the
Federal Reserve raises interest rates as it fights to control
inflation.
    Over the past two days Treasuries rallied, with the 10-year
note's yield tumbling more than 20 basis points to a low of
3.508% on Monday, after data on jobs and services activity last
week suggested inflation was moderating faster than expected.
    CPI on Thursday is expected to show a 6.5% year-over-year
rise in December, while core CPI is expected to show a 5.7%
gain, which is about three times as fast as the Fed's 2% target.
    "We think that the Fed's emphasis is on inflation still
being too high, too elevated, and there's a desire to get to a
terminal rate, or a restrictive rate, sooner than later," said
Kim Rupert, managing director of global fixed income at Action
Economics in San Francisco.
        The sooner-than-later rationale has Rupert anticipating
a 50 basis point rate hike on Feb. 1, as opposed to the market's
view of a 75% chance policymakers hike by 25 bps.

        The terminal rate to a range of 5.0-5.25% with another
25 bps hike in March, when the Fed would hold that line for most
of the remaining year, she said.

        The yield on 10-year Treasury notes
    rose 9.8 basis points
     to
    3.615
    %, while the two-year's yield, which typically
moves in step with interest rate expectations,
    rose 5.2 basis points
     at
    4.251
    %.

        The gap between yields on two- and 10-year notes
, seen as a recession harbinger when shorter-dated
bills and notes are higher than longer-dated notes and bonds,
was at
    -63.8
     basis points.

    Anthony Saglimbene, chief market strategist at Ameriprise
Financial in Troy, Michigan, said investors might have gotten a
bit ahead of themselves as they anticipate the Fed will cut
rates by year's end.
    "The market is still anticipating that the Fed is going to
bring that terminal rate up to a lower high-water mark than the
Fed is implying," he said.
    Fed Chair Jerome Powell said on Tuesday that the U.S.
central bank's independence from political influence is central
to its ability to battle inflation.
    "Restoring price stability when inflation is high can
require measures that are not popular in the short term as we
raise interest rates to slow the economy," Powell said in
prepared remarks to a forum on central bank independence
sponsored by the Swedish central bank.
    Saglimbene sees the Fed's target rate around 5%-5.25% this
year, while policymakers project the rate at 5.1% in 2023.
    The Treasury's sale of $40 billion in three-year notes was
very strong, with a high yield at 3.977%, more than two basis
points below the market at the deadline for bidding, said Lou
Brien, market strategist at DRW Trading in Chicago.
        The bid cover was 2.84 to 1, the highest in about four
years, while indirect accounts took 69.5% of the total, the
largest percentage on record for this group, Brien said.

        The strength from indirect accounts suggests strong
foreign interest as this category includes mostly non-U.S.
entities and could indicate a safe-haven bid, he said.

        Perhaps "the Fed is going to be less aggressive with its
policy moves over the medium term, as compared to the ECB
(European Central Bank) or other central banks, he said.

        The yield on the 30-year Treasury bond
    rose 9.3 basis points
     to
    3.743
    %.

        The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was at
2.244%, while the 10-year TIPS breakeven rate was
2.235%, indicating the market sees inflation averaging 2.2% a
year for the next decade.
     Jan. 10 Tuesday 2:21 p.m. New York / 2021 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             4.5725       4.6908    0.076
 Six-month bills                               4.705        4.8869    0.054
 Two-year note                                 99-255/256   4.2514    0.052
 Three-year note                               100-12/256   3.982     0.043
 Five-year note                                100-170/256  3.7271    0.076
 Seven-year note                               101-56/256   3.675     0.086
 10-year note                                  104-48/256   3.6151    0.098
 20-year bond                                  101-64/256   3.9086    0.098
 30-year bond                                  104-152/256  3.7429    0.093

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 28.00        -1.25
 U.S. 3-year dollar swap spread                 11.75         1.25
 U.S. 5-year dollar swap spread                  0.50        -0.25
 U.S. 10-year dollar swap spread                -6.00         0.25
 U.S. 30-year dollar swap spread               -46.00         0.25

 (Reporting by Herbert Lash; Editing by Susan Fenton and Nick
Zieminski)