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TREASURIES-Yields fall as risk appetite ebbs, Treasury to sell 2-year notes

       By Karen Brettell
    NEW YORK, May 24 (Reuters) - U.S. Treasury yields dipped on
Tuesday as weakness in equities revived safe-haven demand for
the debt, and the closely watched two- to 10-year yield curve
flattened before a sale of two-year notes.
    Longer-dated yields have dropped from 3-1/2 year highs as
sharp declines in stocks increased demand for U.S. government
debt, and as investors worry that the Federal Reserve's
aggressive plans to hike rates will tip the economy into a
recession.
    "There's a bit of 'risk off' going on, based on some of the
earnings that are being announced," said Tom di Galoma, managing
director at Seaport Global Holdings in New York.
    Wall Street's main indexes opened lower as weak forecasts
from firms including Snapchat owner Snap Inc (SNAP) added to
nerves about an inflation-struck economy.
    At the same time, "there has been some domestic interest in
this rate rise, where accounts have come to this decision that a
recession is probably a lot closer than the market thinks," di
Galoma said.
    Minutes from the Fed's May meeting released on Wednesday are
likely to show that the U.S. central bank remains committed to
tightening policy at a rapid pace as it tackles soaring
inflation.
    Fed funds futures traders are pricing in 50 basis point rate
increases for each of the Fed's June and July meetings, and a
strong possibility of the same in September. The Fed's benchmark
rate is expected to rise to 3.01% by March, from 0.83% now.

    However, some investors also see the possibility that the
Fed could pivot to a less aggressive stance if the economy
weakens significantly.
    Atlanta Fed President Raphael Bostic said on Monday that it
"might make sense" to pause further hikes after the June and
July meetings for the U.S. central bank to assess the impact on
inflation and the economy.
    Two-year note yields underperformed on Tuesday, shrinking
the gap between two-year and 10-year yields before the Treasury
Department sells $47 billion in two-year notes, the first sale
of $137 billion in new coupon-bearing debt this week.
    The government will also sell $48 billion in five-year notes
on Wednesday and $42 billion in seven-year notes on Thursday.
    The two-year notes were last down five basis
pioints at 2.573%. Benchmark 10-year notes fell
seven basis points to 2.790%. The two-year, 10-year yield curve
 flattened one basis point to 22 basis points.
    Inflation expectations also dipped, with breakeven rates on
five-year Treasury Inflation-Protected Securities (TIPS)
, a measure of expected average annual inflation for
the next five years, at 2.88% on Tuesday. They have fallen from
a peak of 3.62% last month.
    Falling inflation expectations is seen as key to stabilizing
markets, which have been roiled as investors price in an
increasingly aggressive Federal Reserve path to tighter monetary
conditions.

      May 24 Tuesday 9:35AM New York / 1335 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             1.0525       1.07      -0.008
 Six-month bills               1.5125       1.5454    -0.021
 Two-year note                 99-221/256   2.5725    -0.053
 Three-year note               100-16/256   2.7278    -0.063
 Five-year note                99-192/256   2.8044    -0.072
 Seven-year note               100-76/256   2.8273    -0.070
 10-year note                  100-188/256  2.7901    -0.069
 20-year bond                  100-208/256  3.1946    -0.064
 30-year bond                  97-120/256   3.0037    -0.062

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        30.00         1.50
 spread
 U.S. 3-year dollar swap        14.25         1.25
 spread
 U.S. 5-year dollar swap         2.00         0.25
 spread
 U.S. 10-year dollar swap        5.00         0.00
 spread
 U.S. 30-year dollar swap      -27.25         0.25
 spread


 (Reporting by Karen Brettell; Editing by Emelia
Sithole-Matarise)

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