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TREASURIES-U.S. yields rise as risk appetite recovers ahead of 7-year note auction

 (Refiles to add dropped words, fix tense in headline)
    * U.S. 5-year auction shows strong results
    * U.S. 10-year breakeven inflation falls
    * NY Fed's reverse repo volume hits $450 bln, 3rd largest
ever
    * Focus on Thursday's U.S. 7-year note auction

    By Gertrude Chavez-Dreyfuss
    NEW YORK, May 26 (Reuters) - U.S. Treasury yields edged
higher on Wednesday in choppy trading, with those on the long
end rising from three-week lows, amid a recovery in risk
appetite with gains in stocks as well as profit-taking from
recent spikes in bond prices.
    The fall in Treasury prices came despite a strong U.S.
5-year note auction, which came on the heels of an equally
robust 2-year note sale on Tuesday.
    "It appears the market got a little too rich, especially
ahead of key inflation data due out Friday," Action Economics
said in its blog right after the auction.
    The market is expecting the core PCE index, the Fed's
preferred inflation gauge, to rise 0.6% in April from a 0.4%
increase in March.
    Bond investors in recent sessions seemed to be less
concerned about inflation, analysts said, as they bought the
long end of the curve that pushed their yields lower.
    The Federal Reserve reiterated its view, through officials
that spoke this week, that current inflation pressures are
temporary.
    Wednesday's strong auction of 5-year notes failed however to
entice the market to continue pushing bond prices higher.
    This offering was awarded at 0.788%, lower than the expected
0.794% yield at the bid deadline.
    Bids at $151.8 billion were a record high, Action Economics
said, for a 2.49 bid-to-cover ratio, better than both the 2.31
last month and the 2.40 average. 
    Treasuries did not initially react after the auction, but
their yields subsequently rose and some said this could be in
preparation for Thursday's sale of $62 billion in 7-year debt.
    "Without any compelling stories, there's not a lot of room
to maneuver," said Jim Vogel, senior rates strategist at FHN
Financial in Memphis, Tennessee. "So if dealers have to sell
their positions because they have to take on 7s tomorrow, then
you're going to pressure the market a little bit."
    In afternoon trading, the U.S. 10-year Treasury yield rose
to 1.577% from 1.564% late on Tuesday. 
    U.S. 30-year yields, meanwhile, were up at 2.262%
 from Tuesday's 2.26%. 
    Post-auction, the U.S. 5-year yield climbed to 0.782%
, from 0.774% on Tuesday.
    In a sign that bond investors are less nervous about
inflation, the U.S. 10-year inflation breakeven, the bond
market's gauge of investors' price outlook over the next 10
years, fell to 2.430% on Wednesday from Tuesday's
2.449%. In mid-May, 10-year breakeven inflation hit 2.564%, the
highest since March 2013.
    In the overnight repo market, the rate was steady at 0.02%
, after falling to -0.01% earlier this week amid a glut
of cash in the financial system.
    The Federal Reserve's reverse repurchase facility showed
volume of $450.2 billion on Wednesday, representing overnight
loans by financial institutions to the Fed at a 0% interest.
Wednesday's reverse repo operations were the third largest since
the facility was launched in 2013.
    
      May 26 Wednesday 2:56PM New York / 1856 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.01         0.0101    -0.005
 Six-month bills               0.03         0.0304    -0.005
 Two-year note                 99-245/256   0.1466    -0.005
 Three-year note               99-216/256   0.3029    -0.003
 Five-year note                99-216/256   0.7824    0.008
 Seven-year note               100-28/256   1.2334    0.011
 10-year note                  100-116/256  1.5757    0.012
 20-year bond                  101-76/256   2.1695    0.005
 30-year bond                  102-124/256  2.2604    0.000
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         7.75        -0.75    
 spread                                               
 U.S. 3-year dollar swap        10.75        -0.25    
 spread                                               
 U.S. 5-year dollar swap         7.75        -0.25    
 spread                                               
 U.S. 10-year dollar swap       -4.25        -0.25    
 spread                                               
 U.S. 30-year dollar swap      -29.75         0.25    
 spread (Reporting by Gertrude Chavez-Dreyfuss
Editing by Mark Heinrich)
  
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