TREASURIES-U.S. yield curve flattest in 10 years after U.S. data

(Updates prices, adds comment, table, byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, Nov 15 (Reuters) - The U.S. Treasury yield curve

flattened to a 10-year low on Wednesday after data showed a

slight pickup in U.S. inflation, as the market priced in further

interest rate hikes from the Federal Reserve next year.

The flattening of the yield curve reflects expectations that

the Fed will continue to tighten interest rates, pushing yields

on the short end higher. At the same time, U.S. inflation,

although trending higher, will remain subdued, limiting yields

on longer-dated bonds.

The gap (Frankfurt: 863533 - news) between U.S. two-year note and U.S. 10-year note

yields contracted to 63 basis points, the flattest since

November 2007.

The difference in five-year and 30-year yields also narrowed

to 75 basis points, the flattest in nearly two

weeks.

U.S. consumer prices, meanwhile, barely rose in October, but

rising rents and healthcare costs pointed to a gradual buildup

in underlying inflation.

"What we saw today was actually good news on inflation: It

is normalizing and that is what the Fed wants," said Bruno

Braizinha, interest rates strategist, at Societe Generale (Swiss: 519928.SW - news) in New (KOSDAQ: 160550.KQ - news)

York.

Another report showed U.S. retail sales unexpectedly rose

0.2 percent in October, while the data for September was revised

to show sales jumping 1.9 percent rather than the previously

reported 1.6 percent advance.

"This morning's reports will be the last CPI and retail

sales reports the Fed will have before heading into their

December meeting, and we believe they clear the fairly low bar

set by Fed speakers for the FOMC (Federal Open Market Committee)

to go ahead with a hike at next month’s meeting," said Michael

Feroli, an economist at JP Morgan in New York.

In midmorning trading, the 10-year Treasury yield

fell to 2.345 percent, from 2.381 percent late on

Tuesday.

The U.S. two-year yield was at 1.691 percent,

unchanged from Tuesday.

U.S. 30-year bond yields slid to 2.798 percent,

down from Tuesday's 2.839 percent.

November 15 Wednesday 10:26AM New York / 1526 GMT

Price

US T BONDS DEC7 153-24/32 0-28/32

10YR TNotes DEC7 125 0-68/256

Price Current Net

Yield % Change

(bps)

Three-month bills 1.2525 1.2739 0.003

Six-month bills 1.3675 1.3961 0.000

Two-year note 99-162/256 1.6915 0.000

Three-year note 99-218/256 1.8011 -0.011

Five-year note 99-208/256 2.0399 -0.025

Seven-year note 100-44/256 2.2231 -0.034

10-year note 99-44/256 2.3434 -0.038

30-year bond 99-12/256 2.7972 -0.042

DOLLAR SWAP SPREADS

Last (bps) Net (LSE: 0LN0.L - news)

Change

(bps)

U.S. 2-year dollar swap 17.50 -1.00

spread

U.S. 3-year dollar swap 17.00 0.00

spread

U.S. 5-year dollar swap 5.75 0.00

spread

U.S. 10-year dollar swap -1.75 0.25

spread

U.S. 30-year dollar swap -24.75 0.25

spread

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu

Nomiyama and Jonathan Oatis)