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TREASURIES-U.S. yields trade flat even as New York state prices paid index spikes

 (Adds results of Treasury auction)
    By Herbert Lash
    NEW YORK, May 17 (Reuters) - U.S. Treasury yields traded
little changed on Monday, shrugging off the highest prices ever
paid in a May manufacturing survey for New York state, as
traders mull how tolerant Federal Reserve policymakers will be
as the pace of inflation quickens.    
    The yield on benchmark 10-year U.S. Treasury notes
 was up 2 basis points at 1.6%37, well below a spike
to 1.77% in late March.
    The Empire State Manufacturing Survey, produced by the New
York Fed, showed the prices paid index rose to a record 83.5,
the highest since the data series began in 2001, said Tom
Simons, money market economist at Jefferies & Co.
    "The Fed has been pretty consistent in its message that it's
going to be quite tolerant of inflation, it's not going to cause
them to raise rates prematurely or pull back on asset
purchases," Simons said.
    "That's why the market has been relatively calm," he said. 
    Weaker-than-expected U.S. retail sales on Friday reassured
the market that extended inflation was not ahead and that the
Fed would not be forced to tighten early, said Sebastien Galy,
senior macro strategist at Nordea Asset Management.
    Bond markets barely reacted to remarks on Monday from
Federal Reserve officials. 
    The U.S. economy is in a "very fluid period" and if data
were to threaten to raise inflation expectations the Fed would
act, said Federal Reserve Vice Chair Richard Clarida.
    The baseline view is that achieving maximum employment will
not put undue pressure on prices, Clarida said.
    Now is not the time to change the Fed's strong accommodative
stance, Atlanta Fed President Raphael Bostic told CNBC, adding a
healthy level of inflation is a sign the economy is growing.
    The Treasury's auction of $57 billion in three-month bills
and $54 billion in six-month bills was routine, with the longer
tranche outperforming slightly, according to Action Economics.
    The yield on the 30-year Treasury bond fell 0.6
basis point to 2.3495%. 
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.719%, after closing at 2.731% on Friday, near its highest
close in just over a decade.
    The 10-year TIPS breakeven rate was last at
2.550%, indicating the market sees inflation averaging about
2.5% a year for the next decade.

  May 17 Monday 1:47PM New York / 1747 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.01         0.0101    0.000
 Six-month bills               0.03         0.0304    0.000
 Two-year note                 99-242/256   0.1531    0.002
 Three-year note               99-192/256   0.334     0.005
 Five-year note                99-164/256   0.8242    0.008
 Seven-year note               99-192/256   1.2877    0.005
 10-year note                  99-228/256   1.6369    0.002
 20-year bond                  93-244/256   2.2561    0.007
 30-year bond                  100-140/256  2.3495    -0.006
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 GooU.S. 2-year dollar swap      9.75        -1.00    
 spread                                               
 U.S. 3-year dollar swap        11.25        -0.75    
 spread                                               
 U.S. 5-year dollar swap         7.75        -0.75    
 spread                                               
 U.S. 10-year dollar swap       -4.50        -0.75    
 spread                                               
 U.S. 30-year dollar swap      -32.25        -0.75    
 spread (Reporting by Herbert Lash in New York
Editing by Matthew Lewis and Alistair Bell)
  
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