TREASURIES-U.S. 10-year yield hits five-month high; curve steepens for 2nd day

By Gertrude Chavez-Dreyfuss NEW YORK, Oct 20 (Reuters) - U.S. benchmark 10-year Treasury yields climbed to five-month peaks in choppy trading on Wednesday, as the yield curve steepened again for a second day, in a move that suggested some investors may be having second thoughts about pricing a too aggressive monetary tightening from the Federal Reserve. The 10-year yield rose to 1.673%, the highest since May 20. It last pulled back to 1.632%. Investors also sold bonds ahead of the $24-billion auction of re-opened 20-year debt sale later on Wednesday. Market participants tend to sell Treasuries ahead of an auction to push yields higher so they can buy them at a lower price in a move called "supply concession." Prior to the curve steepening this week, the yield curve had flattened the last few sessions on expectations that the Fed will tighten interest rates earlier than expected, pushing yields on the short end higher. The rise in long-dated yields steepened the curve again, with the spread between U.S. 5-year notes and U.S 30-year bonds at nearly 96 basis points. Analysts said the move higher in long-dated yields was precipitated by comments from Fed Governor Christopher Waller late on Tuesday, saying the Fed may have to adopt "a more aggressive policy response" if high inflation continues through the end of the year. Waller feels that the risks are shifting, and he is now "greatly concerned" the current fast rise in prices may continue. Futures on the U.S. federal funds rate, which track short-term interest rate expectations, on Wednesday continued to price in a rate increase next year, although, the percentages have come down. On Wednesday, futures trade have reduced the chances of a quarter-point tightening by the Fed in June to 42%, from 60% on Monday. Traders also pared back the odds of a rate hike in July to 58% on Wednesday, from 82% on Monday. "We see nothing inappropriate about current market pricing. Agree with it or not is another question," said Gregory Faranello, head of U.S. rates at Amerivet Securities in New York. "With taper baked in, and inflation running hotter and longer than the Fed expected, pricing in potential rate increases in 2022 is rational. Certainly, the Fed will continue to push back," he added. In afternoon U.S. trading, U.S. 5-year yield, which reflects Fed tightening, was last down a basis point at 1.1423%. It has been on an uptrend in the last two weeks, touching its highest since February 2020 at 1.193% on Monday. U.S. 20-year yields rose to one-week highs of 2.1% ahead of the 20-year bond auction. The yield was last down 1 basis point at 2.0784%. Wells Fargo, in a research note, said it expects the 20-year auction to go well later on Wednesday. "The 20-year yield is around 27 basis points higher than the Sep. 21 auction clearing level. Even with much lower yields last month, end user demand was robust," the U.S. bank said. U.S 30-year yields also touched one-week peaks of 2.1210% and were last up nearly 2 basis points at 2.1048%. October 20 Wednesday 10:36AM New York / 1436 GMT Price Current Net Yield % Change (bps) Three-month bills 0.055 0.0558 0.000 Six-month bills 0.06 0.0609 0.000 Two-year note 99-191/256 0.3813 -0.012 Three-year note 99-200/256 0.6992 -0.011 Five-year note 98-176/256 1.1489 -0.006 Seven-year note 98-158/256 1.4601 -0.004 10-year note 96-128/256 1.6373 0.003 20-year bond 94-168/256 2.0803 0.013 30-year bond 97-164/256 2.1069 0.021 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 15.75 0.00 spread U.S. 3-year dollar swap 14.25 -0.25 spread U.S. 5-year dollar swap 7.00 0.25 spread U.S. 10-year dollar swap 0.25 0.00 spread U.S. 30-year dollar swap -23.25 0.25 spread (Reporting by Gertrude Chavez-Dreyfuss Editing by Nick Zieminski)