TREASURIES-U.S. Treasury yields edge up before next week's Fed meeting

    (Adds comment, fresh prices)
    By Herbert Lash
    NEW YORK, July 23 (Reuters) - Treasury yields rose on Friday
ahead of the Federal Reserve's policy-setting meeting next week,
which will provide clues on the strength of the U.S. recovery
and when the central bank might start to curb its economic
support.
    The yield on 10-year Treasury notes hovered just
below 1.3%, or almost 17 basis points higher than a five-month
low set Tuesday, but still at the low end of a recent range.
    The benchmark note traded up 2.1 basis points at 1.288%
after briefly rising above 1.3%. The yield on the 30-year
Treasury bond rose 2.2 basis points to 1.925%.
    The Treasury market has gone from oversold to overbought and
is seeking equilibrium as fears ebb that the COVID-19 Delta
variant would lead to lockdowns and slow the economy, said
Steven Ricchiuto, U.S. chief economist at Mizuho Securities.
    "What we're really seeing take place is a good deal of
speculative flavor in a very, very thin market," Ricchiuto said.
"The market has to go back and find a more realistic level and
that's what it is attempting to do right now."
    The specter of renewed lockdowns and the Fed's insistence
that inflation will remain within its new 2% target spurred a
sharp rally in Treasury prices, which move inversely to yields.
    But the durability of that rally, given expectations for
improving fundamentals through this year, is questionable
barring renewed lockdowns, said Jonathan Cohn, trading
strategist at Credit Suisse Securities USA LLC.
    "We continue to believe yields ought to go higher but at
this point think it's prudent to be more tactical with entry
points and holding periods as the market attempts to find an
equilibrium," he said.
    Real yields are close to record lows and the market is
questioning whether the Fed can hike more than a couple of times
given tapering is actively discussed, with inflation data
surprising on the upside, Cohn said.
    This "speaks to that need to be tactical and respect some of
the puzzling price action in rates," he said.
    A closely watched part of the U.S. Treasury yield curve
measuring the gap between yields on two- and 10-year Treasury
notes, seen as an indicator of economic
expectations, was at 108.3 basis points.
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was unchanged at
0.202%.
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.543%.
    The 10-year TIPS breakeven rate was last at
2.332%, indicating the market sees the consumer price index
averaging at that rate annually for the next decade.

  July 23 Friday 2:41PM New York / 1841 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.05         0.0507    0.003
 Six-month bills               0.05         0.0507    0.000
 Two-year note                 99-218/256   0.2021    0.000
 Three-year note               100          0.375     0.000
 Five-year note                100-192/256  0.7198    0.008
 Seven-year note               101-112/256  1.0345    0.016
 10-year note                  103-24/256   1.288     0.021
 20-year bond                  106-164/256  1.848     0.023
 30-year bond                  110-44/256   1.9248    0.022

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap         8.00         0.00
 spread
 U.S. 3-year dollar swap        10.50         0.50
 spread
 U.S. 5-year dollar swap         8.50         0.25
 spread
 U.S. 10-year dollar swap       -0.50        -0.50
 spread
 U.S. 30-year dollar swap      -27.25        -0.50
 spread


 (Reporting by Herbert Lash; Editing by Dan Grebler and Richard
Chang)

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