TREASURIES-U.S. yields rise as some question rate cut scenario

    (Adds comment, UMich survey, fresh prices)
    By Herbert Lash
       NEW YORK, Jan 13 (Reuters) - Treasury yields edged higher on Friday after slipping the
day before on a fall in December headline consumer prices, as some investors balked at the
market's take that the Federal Reserve will be forced to cut interest rates later this year.
    The first decline in CPI since May 2020, a 0.1% dip that may pressure the Fed to slow the
pace of its rate hikes, led Treasuries to rally and push the 10-year's yield down to
a month low of 3.424% on Thursday. Yields move inversely to their price.
        The University of Michigan Surveys of Consumers on Friday showed the
    one-year inflation outlook slipped
     to a preliminary reading of 4.0% in January from 4.4% last month, adding to the narrative
that inflation has peaked and will slow considerably.

    The benchmark 10-year yield rose 4.7 basis points to 3.494% on Friday after sliding to
3.418% in early trade, in a sign some in the market question the Fed's insistence rates will
stay higher for longer.
        A major turning point for the market and a game-changer that would sharply improve risk
appetite is when the Fed stops raising policy rates, said Benoit Anne, lead strategist for the
investment solutions group at MFS Investment Management in London.

        However, the market is pricing extremely aggressive rate cuts when in fact rates will
stay high for some time, he said.

        "We have a couple of hikes still in the pipeline and I see a sustained period where the
Fed will stay put," Anne said.

        Johan Grahn, head of ETF Strategy at AllianzIM in Minneapolis, agreed.

        "The market is still not listening to what is coming from the Fed. The market is pricing
in rate cuts already some time later this year, and that is not at all what the Fed is trying to
get the market to see," Grahn said.
        The market sees a 91.6% probability the Fed hikes rates by 25 basis points when it
concludes a policy meeting on Feb. 1.

    Also, futures prices for the Fed's target range for rates has fallen to 4.921% in June and
4.453% in December, as the market predicts the Fed cuts rates later this year.
    Fed policymakers have indicated the U.S. central bank's target rate will stay above 5% this
year.
    Thursday's CPI data reduced the likelihood of more Fed rate hikes, said Tom di Galoma,
co-head of global rates trading at BTIG in New York.
    "I find it hard to believe that two weeks ago Fed governors were talking about a 5.5%-6% fed
funds rate," di Galoma said. "These Fed governors don't necessarily have staying power with
their position."
        Data showing slowing inflation and the Fed's stance on keeping rates "higher for longer"
poses a dilemma for the market, he said.

        "This tightening process is coming to an end in my view," di Galoma said. "We might be
seeing the last Fed rate hike on Feb. 1. That's a very real possibility."

    The two-year U.S. Treasury yield, which typically moves in step with interest
rate expectations, rose 7.9 basis points at 4.217%.
    News that JPMorgan Chase & Co JPM.N said it set aside $1.4 billion in anticipation of a mild
recession rattled markets, with a recession harbinger - the gap between two- and 10-year yields
 - widening to -72.5 basis points.
    The yield on the 30-year Treasury bond rose 3.7 basis points to 3.611%.
        The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS)
 was 2.263% and the 10-year TIPS breakeven rate was 2.203%, indicating
the market sees inflation averaging 2.2% a year for the next decade.
     January 13 Friday 1:36PM New York / 1836 GMT
                                           Price       Current  Net
                                                       Yield %  Change
                                                                (bps)
 Three-month bills                         4.5075      4.6199   0.011
 Six-month bills                           4.6225      4.7957   -0.002
 Two-year note                             100-15/256  4.2174   0.079
 Three-year note                           99-252/256  3.8805   0.069
 Five-year note                            101-64/256  3.5969   0.053
 Seven-year note                           101-252/25  3.5502   0.052
                                           6
 10-year note                              105-52/256  3.4943   0.047
 20-year bond                              103-20/256  3.7777   0.037
 30-year bond                              107-16/256  3.6111   0.037

   DOLLAR SWAP SPREADS
                                           Last (bps)  Net
                                                       Change
                                                       (bps)
 U.S. 2-year dollar swap spread             26.75       -2.00
 U.S. 3-year dollar swap spread             14.00       -1.25
 U.S. 5-year dollar swap spread              3.75        0.00
 U.S. 10-year dollar swap spread            -3.75       -0.25
 U.S. 30-year dollar swap spread           -39.75        0.25

 (Reporting by Herbert Lash; Editing by Conor Humphries and Deepa Babington)