TREASURIES-U.S. long-dated yields fall to one-week lows; 2-year note auction well-received

* U.S. 2-year note auction show strong results
* Tuesday's batch of U.S. data was better than expected.
* U.S. 5-year breakeven rates hit highest since January 2004

(Adds new comment, auction results, update prices)
By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 26 (Reuters) - U.S. Treasury yields were mixed
on Tuesday in thin volume, with those on the long end of the
curve falling for a third straight session, as investors looked
to next week's Federal Reserve meeting for clues on the timing
of its first interest rate hike since December 2018.
U.S. 10-year, 20-year, and 30-year Treasury yields all fell
to one-week lows.
A strong U.S. 2-year note auction, meanwhile, did little to
drum up bids for the short end of the curve, as prices stayed
lower. The auction posted a high yield of 0.481%, lower than the
expected rate at the bid deadline, suggesting investors accepted
a lower premium for the note. The bid-to-cover ratio, a gauge of
demand, was 2.69, compared with an average of 2.50.
A batch of better-than-expected U.S. data lifted short-dated
note yields, flattening the curve, as investors priced in rate
hikes by the Fed sooner rather than later. The spread between
U.S. 5-year notes and 30-year bonds narrowed to 86.9 basis
points.
Tuesday's data showed U.S. consumer confidence unexpectedly
rose in October as concerns about high inflation were offset by
improving labor market prospects. U.S. new home sales also
surged, up 14% in September.
"I think what is going on is that rate hike fears are being
priced on the U.S. front-end at an accelerated pace," said Steve
Feiss, managing director, fixed income, at broker-dealer Etico
Partners.
Further fanning earlier-than-expected Fed rate hikes is the
surge in U.S. inflation.
The U.S. 5-year inflation breakeven rate, which reflects
inflation expectations over the next five years, hit another
milestone on Tuesday, rising to 2.985%, the highest
since at least January 2004.
The 10-year breakeven rate also hit a milestone, climbing to
2.695% <US10YTIP =RR>, its highest since May 2006.
Fed funds futures are pricing in a 70% chance of a
June rate hike on Tuesday, even though the U.S. central bank's
taper of asset purchases, if it begins in November, could end in
June as well.
Overall, rates futures traders are also betting on two rate
hikes next year, the second one being in December.
In afternoon U.S. trading, the benchmark U.S. 10-year yield
was down nearly 2 basis points at 1.6185%.
The U.S. 5-year yield, which reflects Fed tightening, was up
half a basis point at 1.1828%. It touched an
eight-month high of 1.193% last week.
U.S. 30-year yields fell 3 basis points at 2.0506%
.
Jim Vogel, senior rates strategist at FHN Financial, said
volume was thin for a third straight session on Tuesday, adding
that the longer this runs, "the direction of the next sizeable
move will grow in technical importance."

October 26 Tuesday 3:24PM New York / 1924 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 0.055 0.0558 0.000
Six-month bills 0.06 0.0609 -0.002
Two-year note 99-158/256 0.4498 0.013
Three-year note 99-152/256 0.7637 0.011
Five-year note 98-136/256 1.1828 0.005
Seven-year note 98-156/256 1.4618 -0.005
10-year note 96-172/256 1.6185 -0.016
20-year bond 95-116/256 2.0299 -0.033
30-year bond 98-228/256 2.0499 -0.035

DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 17.25 0.00
spread
U.S. 3-year dollar swap 16.00 0.00
spread
U.S. 5-year dollar swap 8.75 0.00
spread
U.S. 10-year dollar swap 3.00 0.25
spread
U.S. 30-year dollar swap -19.00 1.25
spread


(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci
and Sonya Hepinstall)