TREASURIES-Yields little changed after Fed minutes show need to hike rates

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(Adds comment, details from Fed minutes, fresh prices) By Herbert Lash and Karen Brettell NEW YORK, May 25 (Reuters) - Benchmark U.S. Treasury yields were little changed on Wednesday after minutes from the Federal Reserve showed policymakers agreed to hike interest rates by a half-percentage point to combat inflation and said a "very strong" economy may require reducing monetary supply. Yields earlier in the session hit six-week lows after data showed new orders for U.S. made capital goods rose less than expected in April, suggesting headwinds already are growing from rising rates and tighter financial conditions. The yield on 10-year Treasury notes slipped 1.5 basis points to 2.745% after falling in the morning to 2.708%, a low last seen March 14. Minutes from a policy-setting meeting earlier in May show the Fed grappling with how best to lower inflation without causing a recession or pushing the unemployment rate substantially higher. Several policymakers said the task would prove challenging in the current environment. Policymakers agreed inflation risks were skewed to the upside and that a 'restrictive' stance, or reducing money supply, may well become appropriate, the minutes showed. Rates have fallen because the bond market sees the economy slowing and the pace of inflation beginning to slow too, said Joseph LaVorgna, chief economist for the Americas at Natixis. "We have seen a significant rally in long rates from where we were a couple of weeks ago," LaVorgna said. "That rally has been due entirely to the lowering of the market's expectation of the terminal Fed funds rate." The Treasury Department sold $48 billion of five-year notes at auction at a high yield of 2.736%, a fraction higher than the market at the bidding deadline. The sale was mediocre, said Lou Brien, a strategist at DRW Trading Group. The U.S. government saw strong demand for a $47 billion sale of two-year notes on Tuesday, the first sale this week of $137 billion in new coupon-bearing debt. The yield on the 30-year Treasury bond was down 0.4 basis points to 2.968%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 23.7 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.5 basis points at 2.506%. In early May they hit a more than three-year high of 2.844%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.905%. The 10-year TIPS breakeven rate was last at 2.581%, indicating the market sees inflation averaging almost 2.6% a year for the next decade. The U.S. dollar 5 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 2.485%. May 25 Wednesday 3:32 PM New York / 1932 GMT Price Current Net Yield % Change (bps) Three-month bills 1.05 1.0674 0.002 Six-month bills 1.4725 1.5042 0.002 Two-year note 99-253/256 2.506 -0.015 Three-year note 100-82/256 2.637 -0.025 Five-year note 100-32/256 2.7225 -0.034 Seven-year note 100-182/256 2.7614 -0.029 10-year note 101-32/256 2.7452 -0.015 20-year bond 101-128/256 3.1481 -0.013 30-year bond 98-40/256 2.9683 -0.004 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 28.25 -2.50 spread U.S. 3-year dollar swap 15.25 1.75 spread U.S. 5-year dollar swap 3.50 1.25 spread U.S. 10-year dollar swap 6.50 1.25 spread U.S. 30-year dollar swap -23.50 2.50 spread (Reporting by Karen Brettell; Editing by Kirsten Donovan and Nick Zieminski)

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