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TREASURIES-Yields give back earlier plunge, focus on Fed rate path

    (Adds quote, 10-year auction results, comments from Fed
officials, updates prices)
    By Karen Brettell
    NEW YORK, Aug 10 (Reuters) - U.S. Treasury yields gave back
most of an earlier drop on Wednesday as investors evaluated how
high the Federal Reserve is likely to raise rates when it meets
in September, after data showed inflation gains stalled in July.
    U.S. consumer prices were unchanged in the month due to a
sharp drop in gasoline prices, delivering the first notable sign
of relief for Americans who have watched inflation climb over
the past two years.
    The Consumer Price Index (CPI) rose by an annual rate of
8.5% in July, while the core CPI, which excludes volatile food
and energy costs, gained 5.9%.
    The drop in Treasury yields immediately after the data
indicates traders were expecting a rise in inflation.
    "The downside miss is certainly not something the markets
were positioned for, I think the market was really one way
positioned for a higher inflation print and higher Fed pricing,"
said Gennadiy Goldberg, an interest rate strategist at TD
Securities in New York.
    The inflation report came after investors ramped up bets
that the Fed would be more hawkish following data on Friday
showing that U.S. job growth unexpectedly accelerated in July.

    "The combination of (nonfarm payrolls) and CPI for July
leave the 75 bp vs. 50 bp Sept hike debate alive and well.
Moreover, this means volatility around incoming data will remain
elevated," Ian Lyngen, head of U.S. rates strategy at BMO
Capital Markets said in a note.
    Fed funds futures traders are now pricing in a 42% chance
that the U.S. central bank will hike rates by 75 basis points
when it meets in September, compared to 68% earlier. A 50 basis
point increase is seen as a 58% probability.
    Benchmark 10-year note yields fell as low as
2.67%, before bouncing back to 2.79%. Two-year note yields
 got as low as 3.08%, before rebounding to 3.22%.
    The yield curve between two-year and 10-year notes
 was at minus 43 basis points after earlier
reaching minus 56 basis points, the deepest inversion since
2000.
    Expectations for the Fed could change again, with more
inflation and employment data for August due before the Fed's
September 20-21 meeting.
    "We've only gotten one out of two CPI prints before then and
we've got another payroll print as well and a full set of data
effectively for August, so I think the jury's still very much
out on September," Goldberg said.
    Chicago Fed President Charles Evans said on Wednesday that
the inflation data was the first "positive" reading on price
pressures since the Fed began tightening policy, but added that
he believes the Fed has plenty more work to do.
    Minneapolis Fed President Neel Kashkari also said he still
believes the U.S. central bank needs to raise its policy rate to
3.9% by year-end and to 4.4% by the end of 2023 to fight
inflation. [Neel Kashkari ]
    The Treasury saw good demand for a $35 billion sale of new
10-year notes on Wednesday, the second auction of $98 billion in
new coupon-bearing supply this week.
    The notes sold at a high yield of 2.755%, around a basis
point below where they had traded before the auction. Demand for
the was 2.53 times the amount of debt on offer, the best ratio
since February.
    The Treasury saw solid demand for a $42 billion sale of
three-year notes on Tuesday and will auction $21 billion in
30-year bonds on Thursday.

      August 10 Wednesday 3:01PM New York / 1901 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.545        2.5971    -0.036
 Six-month bills               2.9675       3.0545    -0.091
 Two-year note                 99-150/256   3.2183    -0.068
 Three-year note               99-238/256   3.1497    -0.066
 Five-year note                99-48/256    2.9267    -0.053
 Seven-year note               98-128/256   2.8638    -0.035
 10-year note                  100-184/256  2.7901    -0.007
 20-year bond                  99-136/256   3.2822    0.038
 30-year bond                  96-180/256   3.0441    0.039

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap        27.25         2.00
 spread
 U.S. 3-year dollar swap         9.75         1.75
 spread
 U.S. 5-year dollar swap         3.25         0.75
 spread
 U.S. 10-year dollar swap        4.50        -0.25
 spread
 U.S. 30-year dollar swap      -31.00        -1.00
 spread



 (Editing by Emelia Sithole-Matarise, Jane Merriman and Josie
Kao)

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