TREASURIES-U.S. yields slide from multi-year highs on hopes of Fed pivot

By Herbert Lash and Gertrude Chavez-Dreyfuss

NEW YORK, Oct 21 (Reuters) - U.S. Treasury yields fell from multi-year highs on Friday after a report suggesting the Federal Reserve is likely to debate in two weeks whether to signal plans for a smaller interest rate hike in December.

The market is pricing in a 75 basis-point hike when Fed policymakers meet on Nov. 1-2, but the U.S. central bank is divided on whether they hike another 75 bps in December or reduce the pace of their tightening to 50 bps, the Wall Street Journal reported on Friday.

Fed officials would want to prepare investors for such a decision in the weeks after the Federal Open Market Committee meeting in November, the report added.

"This debate about exactly where we should go, and then become more data-dependent, is going to heat up in the last part of the year here," St. Louis Fed President James Bullard said in a Reuters interview last week.

The yield on the benchmark 10-year Treasury US10YT=RR hit 4.338% earlier, the highest since November 2007. The yield last fell 1.8 basis points to 4.208%. The two-year U.S. Treasury yield US2YT=RR, which typically reflects interest rate expectations, surged to 4.639%, the highest since August 2007. It was last 12.5 bps lower at 4.4872%.

"The market has been hoping or waiting for a (Fed) pause to come along for the last several months of pain as rates have gone up," said John Luke Tyner, fixed income portfolio manager at Aptus Capital Advisors in Fairhope, Alabama.

"The call for a pause or letting some of the policy play through has increased. We'll continue to see more calls for a slowdown (in Fed policy) as we feel more and more pain in risk markets," he added.

The U.S. two-year/10-year yield curve, seen as a recession harbinger, became less inverted on Friday. The gap between yields on two- and 10-year Treasury notes US2US10=RR, was at -27.5 basis points, that's the steepest since mid-September.

U.S. 30-year yields soared to a new 11-year peak of 4.384% US30YT=RR. They last traded up 9.5 basis points at 4.310%.

The market is torn between those who hope the worst will soon be in the past and those who believe the Fed will tighten policy further at a time when the strong dollar is increasing global tensions, said Andrzej Skiba, head of the BlueBay U.S. Fixed Income team at RBC Global Asset Management.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR was last at 2.689%.

The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.525%, reflecting the average inflation the market has priced in for the next decade.

The U.S. dollar 5 years forward inflation-linked swap USIL5YF5Y=R, seen by some as a better gauge of inflation, was last at 2.540%.

October 21 Friday 3:31PM New York / 1931 GMT

Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

3.905

3.997

-0.004

Six-month bills US6MT=RR

4.2875

4.4412

-0.079

Two-year note US2YT=RR

99-146/256

4.483

-0.127

Three-year note US3YT=RR

99-64/256

4.5218

-0.133

Five-year note US5YT=RR

99-10/256

4.3429

-0.107

Seven-year note US7YT=RR

97-144/256

4.2847

-0.071

10-year note US10YT=RR

88-92/256

4.2104

-0.016

20-year bond US20YT=RR

84-136/256

4.5699

0.083

30-year bond US30YT=RR

78-20/256

4.3135

0.098

DOLLAR SWAP SPREADS

Last (bps)

Net Change (bps)

U.S. 2-year dollar swap spread

37.25

-1.75

U.S. 3-year dollar swap spread

10.25

-1.25

U.S. 5-year dollar swap spread

3.00

-0.25

U.S. 10-year dollar swap spread

0.50

-0.75

U.S. 30-year dollar swap spread

-47.50

-1.75

(Reporting by Herbert Lash and Gertrude Chavez-Dreyfuss; Additional reporting by Harry Robertson in London; Editing by Alun John and Nick Zieminski)

((gertrude.chavez@thomsonreuters.com; 646-301-4124; Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))

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