U.S. yields advance as markets position for hawkish Fed

U.S. yields advance as markets position for hawkish Fed

* U.S. 10-year yield hits 5-week high

* U.S. 30-year yield rises to 7-week peak

* Fed's Powell seen affirming Fed's hawkish stance in Jackson Hole

* U.S. Treasury front-end supply in focus this week

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 22 (Reuters) - U.S. Treasury yields rose on Monday, as investors awaited a Federal Reserve gathering later this week in Jackson Hole, Wyoming, that is expected to reinforce the central bank's commitment to stamping out inflation.

The benchmark 10-year yield hit a five-week high of 3.039%, while the 30-year yield climbed to a seven-week peak of 3.268%.

The auction this week of $126 billion in shorter-dated coupons -- U.S. two-year, five-year, and seven-year notes -- has also added to the sell-off in Treasuries that pushed their yields higher on the day, analysts said.

Traders tend to sell Treasuries before an auction so they can buy them back at a lower price in a move called "supply concession."

The focus though is on possible comments from Fed Chair Jerome Powell, who is scheduled to speak Friday morning at the Jackson Hole symposium.

"Powell is going to be on the hawkish side, but we disagree with him," said Stan Shipley, fixed income strategist, at Evercore ISI in New York.

"We think inflation is cooling here. At some point in time, it would be appropriate for him to recognize that, but it's not going to be at Jackson Hole."

Last week's Fed minutes suggested that the Fed was on course to raise interest rates indefinitely as the central bank saw "little evidence" that inflation pressures were easing. The Fed did acknowledge more explicitly the risk that they might go too far and curb economic activity too much.

Fed funds futures on Monday have priced in a 54.5% chance of a 50 basis-point (bp) rate hike at the Fed's policy meeting next month. The fed funds rate is seen hitting roughly 3.6% by the end of the year, with a peak rate of nearly 3.8% in March 2023 FEDWATCH .

"The Fed is not going to ease up just because we had one positive CPI number," said Mike Zigmont, head of trading & research at Harvest Volatility Management.

"They want to see two or three positive numbers to slow down their pace of hiking. The fed funds rate is only at two and a half percent. So another 75-bps (hike) is not that crazy."

In afternoon trading, the yield on 10-year Treasury notes US10YT=RR was up 4.6 basis points at 3.035%.

The yield on the 30-year Treasury bond US30YT=RR was up 1.6 basis points at 3.241%.

A closely monitored part of the U.S. yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR , seen as an indicator of economic expectations, was inverted at -30.4 basis points.

An inversion of this part of the curve has preceded eight of the last nine recessions, analysts said.

The two-year US2YT=RR U.S. Treasury yield, which typically tracks interest rate moves, was up 7 basis points at 3.335%.

In other parts of the Treasury market, the breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) USBEI5Y=RR was last at 2.8320%, down about 44 bps from 3.2456% hit in mid-June. The five-year breakeven rate suggested that investors expect inflation to average about 2.8% over the next five years.

The U.S. dollar 5-year forward inflation-linked swap USIL5YF5Y=R , seen by some as a better gauge of inflation expectations, was last at 2.575%.

August 22 Monday 3:04PM New York / 1904 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 2.7

2.7553

0.069 Six-month bills US6MT=RR

3.0975

3.1891

0.073 Two-year note US2YT=RR

99-96/256

3.3351

0.070 Three-year note US3YT=RR

99-78/256

3.3721

0.078 Five-year note US5YT=RR

98-16/256

3.1768

0.063 Seven-year note US7YT=RR

96-228/256 3.1269

0.054 10-year note US10YT=RR

97-144/256 3.0349

0.046 20-year bond US20YT=RR

98-84/256

3.492

0.035 30-year bond US30YT=RR

95-104/256 3.2407

0.016

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

37.25

2.50

spread

U.S. 3-year dollar swap

13.25

1.50

spread

U.S. 5-year dollar swap

3.50

0.50

spread

U.S. 10-year dollar swap

6.00

1.00

spread

U.S. 30-year dollar swap

-31.50

0.50

spread


Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Devik Jain in Bengalaru; Editing by Kirsten Donovan and Rosalba O'Brien