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TREASURIES-Yields slide as 30-year bond auction sees strong demand

 (Adds details from auction, remarks)
    By Herbert Lash
    NEW YORK, Jan 13 (Reuters) - U.S. Treasury yields slid on
Wednesday as the Treasury Department completed its final sale of
$120 billion in coupon-bearing supply this week, in which
investors showed strong demand for long-dated bonds.
    An auction of $24 billion in 30-year bonds was well
received, the second day in a row that a government debt sale
attracted strong bids, which helped drive down yields that had
jumped 20 basis points in the past week.
    Investors earlier shrugged off a report showing an increase
in U.S. consumer prices in December amid rising gasoline costs,
as underlying inflation remained tame amid the COVID-19
pandemic, which has hit the labor market and services industry.

    Treasury yields shot higher in the past week through Tuesday
on expectations new fiscal stimulus will boost economic growth
and Treasury supply after two Georgia runoff elections gave
Democrats control of the U.S. Senate as well as the U.S. House
of Representatives and the White House.
    But the jump was overdone and appears the market is now
trying to find a trading range, said Justin Lederer, an interest
rate strategist at Cantor Fitzgerald 
    "It looks like there's a line in the sand, at least for
now," he said. "It doesn't mean that we can't go higher in yield
as the year progresses, but it feels like we've found at least a
saturation point."
    Yields on the benchmark Treasury note dropped to
1.071%, down from an almost 10-month high of 1.187% on Tuesday.
    The Labor Department said its consumer price index increased
0.4% after gaining 0.2% in November, with an 8.4% jump in
gasoline prices accounted for more than 60% of the CPI rise.
    In the 12 months through December the CPI advanced 1.4%
after increasing 1.2% in November.
    The CPI report was relatively in line with expectations,
although the market's outlook on inflation is now at its highest
level since 2018, said Kevin Flanagan, head of fixed income
strategy at WisdomTree Investments Inc.
    "When you're looking at the future, though, with respect to
the CPI numbers, the year-over-year comparisons are going to
begin to weigh in favor of that reflation trade," Flanagan said.
    Inflation readings last year in March, April and May were
very low, which could lead to upside surprises when year-on-year
comparisons are taken into account in the months ahead, he said.
    "It does appear that the stars are in alignment for perhaps
a move to the 1.25% and 1.5%," he said.
    All signs point to rising U.S. inflation though the Federal
Reserve won't pre-emptively react to higher consumer prices by
tightening policy, St. Louis Federal Reserve President James
Bullard said Wednesday at the Reuters Next conference. 
    The money supply has "exploded," fiscal deficits are "off
the charts" and a hot economy may either already be here or
"just around the corner," Bullard said.
    But the Fed needs to regain credibility on inflation after
it has underrun the central bank's 2% target for the last
decade, he added in the interview.
    Investors in the past week have pushed yields higher in
anticipation the Fed could begin raising rates as soon as 2023.
That would be earlier than previously expected.
    Yields also fell as Fed speakers pushed back at speculation
that they are close to curbing bond purchases or raising rates.
    The Fed's current pace of bond buying will likely remain in
place "for quite some time" Fed Governor Lael Brainard said on
Wednesday.
    Fed Chair Jerome Powell will speak on Thursday.
    The yield curve between two-year and 10-year notes
 pared recent gains to 94 basis points. 
    Thirty-year bond yields slid to a session low of
1.807% from a high of 1.915% on Tuesday, the highest level since
March 20.
    Five-year note yields fell to 0.476%, down from
Tuesday when they traded at the highest since March 26.
    
    January 13 Wednesday 2:49PM New York / 1949 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.085        0.0862    0.000
 Six-month bills               0.0925       0.0938    0.003
 Two-year note                 99-245/256   0.147     0.000
 Three-year note               99-178/256   0.227     -0.008
 Five-year note                99-128/256   0.4771    -0.027
 Seven-year note               98-216/256   0.7961    -0.040
 10-year note                  98           1.09      -0.048
 20-year bond                  95-184/256   1.6284    -0.053
 30-year bond                  95-112/256   1.8239    -0.061
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         7.00        -0.75    
 spread                                               
 U.S. 3-year dollar swap         6.00        -0.75    
 spread                                               
 U.S. 5-year dollar swap         7.00        -0.25    
 spread                                               
 U.S. 10-year dollar swap        0.75         0.25    
 spread                                               
 U.S. 30-year dollar swap      -24.75         0.75    
 spread (Reporting by Herbert Lash; additional reporting by Karen
Brettell in New York; editing by Alexander Smith and Jonathan
Oatis)
  
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