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TREASURIES-U.S. yields fall after ECB speeds up interest rate normalization

NEW YORK, July 21 (Reuters) - U.S. Treasury yields fell on Thursday, with the benchmark 10-year note below 3% after the first interest rate hike in 11 years by the European Central Bank turned investors' focus toward an economic slowdown.

The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25-basis-point move, as concerns about runaway inflation trumped worries about growth.

But even as the ECB moved more than expected, the terminal rate was not changed.

"(ECB President Christine) Lagarde said that the size of the move today does not mean that we're going to necessarily see a higher terminal rate, and I think the market focused on that mostly," said Ben Jeffery, rates strategist at BMO Capital Markets in New York.

He said the ECB's move took any lingering pressure away from the Federal Reserve to raise its benchmark overnight interest rate next week by more than the expected 75 basis points.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 8.5 basis points at 3.165%.

The yield on 10-year Treasury notes was down 8.8 basis points to 2.949%. The yield on the 30-year Treasury bond was down 7.2 basis points to 3.098%.

The two- and 10-year Treasury notes yield spread , seen as an indicator of economic expectations, was at -22.0 basis points.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.607%, after closing at 2.682% on Wednesday.

The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.395%. (Reporting by Rodrigo Campos; Editing by Paul Simao)

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