TREASURIES-U.S. yields drop after tame inflation data feeds risk-off mood

       * U.S. 10-year yields post largest monthly fall since April
2020
    * U.S. 5-year yields show biggest monthly drop since March
2020
    * U.S. core PCE inflation rises less than expected in June
    * U.S. 10-year TIPS yield hits another record low

 (New throughout, updates prices, market activity and comments)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, July 30 (Reuters) - U.S. Treasury yields fell on
Friday, as softer-than-expected inflation data fed the view that
the Federal Reserve could delay its exit from quantitative
easing, while investors also worried about the raging Delta
coronavirus variant.
    For July, U.S. benchmark 10-year yields have fallen 23 basis
points, the largest monthly decline since April 2020. The yield
on U.S. 5-year notes, which have come to reflect monetary policy
expectations, has dropped nearly 19 basis points, the biggest
fall since March last year.
    Friday's U.S. data showed core inflation rising less than
forecast in June, paring back some expectations that the Fed
would reduce its asset purchases soon.
    In addition, the highly contagious Delta variant has
prompted the U.S. Centers for Disease Control and Prevention to
reinstitute mask wearing as a precaution against possible
transmission of the virus by fully vaccinated people.
    The yield curve, a gauge of economic sentiment and rate move
expectations, flattened to 104.41 basis points, as measured by
the spread between two-year and 10-year yields.
     Data showed the personal consumption expenditures (PCE)
price index, excluding the volatile food and energy components,
rose 0.4% in June, or 3.5% in the 12 months through June.

    Economists polled by Reuters had forecast the monthly core
PCE price index, the Fed's preferred inflation measure, to rise
0.6% and surge 3.7% year-on-year.
    "The weaker-than-expected inflation data will probably
affirm the view that the Fed is not moving toward tighter policy
anytime soon," said Zachary Griffiths, macro strategist at Wells
Fargo Securities in Charlotte, North Carolina.
    That said, St. Louis Fed president James Bullard, who is not
a voting member this year, said the Fed should start reducing
its $120 billion in monthly bond purchases this fall and cut
them "fairly rapidly" so the program ends in the first months of
2022.
    His comments prompted little reaction from the bond market
since this is not the first time Bullard had backed tighter
monetary policy.
   "The markets are prepared for an announcement in the fall,
not an actual taper," said Ellis Phifer, managing director in
fixed income research at Raymond James in Memphis, Tennessee.
    In afternoon trading, the U.S. 10-year Treasury yield was
down at 1.238%, compared with 1.269% late on
Thursday.
    U.S. 30-year yields fell to 1.894% from
Thursday's 1.916%.
    The yield on 10-year Treasury Inflation-Protected Securities
(TIPS) plunged to a another record low of -1.176% US10YTIP=RR,
as investors priced in higher inflation going forward.
   Some analysts said lower real yields this month reflect
concerns about slowing growth after a strong first half of the
year.
    But Jim Vogel, senior rates strategist, at FHN Financial
said higher inflation is a better explanation.
    "In 2021, negative real yields are a function of the
expected path of short-term interest rates set by the Fed
compared with current and forecasted inflation," Vogel said.
"Bottom line: there is no way that term real yields could be
anything but negative right now."

      July 30 Friday 3:20PM New York / 1920 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.045        0.0456    0.000
 Six-month bills               0.0525       0.0532    0.000
 Two-year note                 99-224/256   0.1878    -0.013
 Three-year note               100-22/256   0.3457    -0.024
 Five-year note                99-162/256   0.6999    -0.030
 Seven-year note               99-244/256   1.007     -0.037
 10-year note                  103-152/256  1.2339    -0.035
 20-year bond                  107-84/256   1.8077    -0.027
 30-year bond                  110-240/256  1.8928    -0.023

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap         7.50         0.25
 spread
 U.S. 3-year dollar swap        12.00         0.25
 spread
 U.S. 5-year dollar swap         8.75         0.00
 spread
 U.S. 10-year dollar swap        2.25        -0.50
 spread
 U.S. 30-year dollar swap      -24.50        -0.75
 spread


 (Reporting by Gertrude Chavez-Dreyfuss; Editing by David
Gregorio)

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