TREASURIES-U.S. Treasury sell-off resumes as Fed officials stay the course

(Adds Bullard comments, fresh prices) By Herbert Lash NEW YORK, Sept 29 (Reuters) - A sell-off in U.S. Treasuries resumed on Thursday as Federal Reserve officials gave no indication the U.S. central bank would moderate or change its plans to aggressively raise interest rates to bring down high inflation. Cleveland Fed President Loretta Mester saidshe does not see distress in U.S. financial markets that would alter the central bank's campaign to lower inflation through rate hikes that have taken the fed funds rate to a range of 3.0%-3.25%. Mester told CNBC that she still sees inflation as the paramount problem facing the U.S. economy, which means the Fed needs to press forward with hiking rates to lift the federal funds target rate to over 4%. "We're not at a point where we should think about stopping on rate hikes," Mester said. "We're still not even in restrictive territory on the funds rate." St. Louis Fed President James Bullard said rates will probably need to be "higher for longer" than markets previously anticipated and that a sharp downtown was not envisioned. "We are at higher recession risk, but that's not the base case at this point," Bullard told reporters on a conference call. The two-year Treasury yield, which typically moves in step with rate expectations, was up 9.8 basis points at 4.192%, while the yield on benchmark 10-year notes rose 5.4 basis points to 3.761%. The 10-year's yield on Wednesday fell 25.6 basis points to 3.707%, its biggest single-day drop since March 2009 as markets reacted to the Bank of England's intervention to halt a deep bond sell-off and crumbling British currency. BoE said it would buy long-dated gilts to restore financial market stability, a move that could lead the Fed to halt its balance sheet reduction to avert a hard U.S. landing, said Joe LaVorgna, chief U.S. economist at SMBC Nikko Securities in New York. The Fed is reducing its balance sheet by $60 billion of Treasuries every month, which is drying up liquidity. By stopping the run-off, rates could go higher and faster, in line with Fed plans to quickly staunch inflation, LaVorgna said. "It seems to me the Bank of England may have a little bit of a template on how in the Fed's mind it may be able to get the funds rate higher," he said. "It is conceivable the Fed could take the playbook out of BoE, the playbook in that in light of market conditions we're either going to slow or temporarily pause on balance sheet reduction," he said. The gap between yields on two- and 10-year Treasuries , seen as a recession harbinger, steepened at -43.3 basis points. The 30-year yield was up 2.9 basis points to 3.710%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.288%. The 10-year TIPS breakeven rate continued to decline and was last at 2.223%, indicating the market sees inflation averaging just over 2.2% a year for the next decade. The rate has fallen from about 2.64% five weeks ago. The U.S. dollar five-years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.273%. Sept. 29 Thursday 2:03 PM New York / 1803 GMT Price Current Net Yield % Change (bps) Three-month bills 3.2575 3.3299 -0.044 Six-month bills 3.8125 3.941 0.023 Two-year note 100-28/256 4.1924 0.098 Three-year note 98-14/256 4.2056 0.084 Five-year note 100-142/256 4.0015 0.080 Seven-year note 99-216/256 3.9007 0.076 10-year note 91-184/256 3.7614 0.054 20-year bond 91-96/256 4.0084 0.023 30-year bond 87-68/256 3.7085 0.027 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap spread 28.00 -3.00 U.S. 3-year dollar swap spread 7.00 -1.00 U.S. 5-year dollar swap spread 4.50 -0.50 U.S. 10-year dollar swap spread 4.50 -0.25 U.S. 30-year dollar swap spread -42.25 -1.25 (Reporting by Herbert Lash Editing by Nick Zieminski and Leslie Adler)