TREASURIES-Yields rise as Fed seen more tolerant of inflation

(Updates prices, adds details on yield curve)

* Most yields inch higher, inflation in focus

* Economic data in focus next week

* U.S. to sell $94 billion 2-, 5-, 7-year notes

* Some short positions pared, hurting yields

By Karen Brettell

NEW YORK (Frankfurt: HX6.F - news) , June 20 (Reuters) - Most U.S. Treasuries edged

higher on Friday, though long bond prices rallied, as investors

focused on inflation concerns, two days after the Federal

Reserve played down a recent uptick in consumer price pressures.

The Fed took a more dovish tone than many expected at its

June meeting, leading to volatile changes in trading positions,

even though benchmark 10-year yields on Friday ended little

changed from before the meeting.

The long-dated yield curve steepened to two-week highs early

on Friday as investors focused on the prospect of higher

inflation, before buying of 30-year bonds erased some of the

move.

"There's the thought I think that maybe (the Fed) will let

inflation run a little bit higher and not raise rates," said Dan

Mulholland, managing director in Treasuries trading at BNY

Mellon in New York.

Data on Friday showed that higher energy costs pushed

Canada's annual inflation rate to a 27-month high of 2.3 percent

in May.

Treasuries yields have fallen this year despite a broad

expectation that they would rise, with short-covering by

investors that made bearish bets heading into the year seen as a

large driver of the rally.

Some investors have been unwinding these losing positions,

however, which may be creating bond weakness.

"We're getting the feeling that some of the shorts are being

pared back, which means that positioning is becoming more

balanced and that's consistent with the modest increase in

yields that we've seen in the last few days," said Boris

Rjavinski, an interest rate strategist at UBS (Xetra: UB0BL6 - news) in New York.

"People that are stuck in these bad bearish trades are

coming to a realization that there will be no major relief in

sight in the following few weeks," Rjavinski said.

Benchmark 10-year notes were last down 1/32 in

price to yield 2.63 percent, up from 2.62 percent late on

Thursday. The notes yielded 3 percent at the beginning of the

year.

The curve between five-year notes and 30-year bonds

flattened to 175 basis points, after earlier

rising to a two-week high of 179 basis points. It is up from a

five-year low of 165 basis points on Monday.

Investors will be focused on a number of indicators due next

week, which cover housing, manufacturing, durable goods,

consumer confidence and gross domestic product.

The Treasury is also due to sell $94 billion in new debt,

including $30 billion in two-year notes on Tuesday, $35 billion

in five-year notes on Wednesday and $29 billion in seven-year

notes on Thursday.

(Editing by Nick Zieminski; and Peter Galloway)