TREASURIES-U.S. yield curve flattens as rate hike bets build

(Updates with market activity, analyst comment) By Saikat Chatterjee and Ross Kerber LONDON/BOSTON, Oct 18 (Reuters) - Mid-term U.S. Treasury yields resumed their upward march on Monday with five-year yields rising to their highest levels since early 2020 as traders positioned for expected central bank rate hikes. Yields on five-year bonds rose as high as 1.193%, their highest since February 2020, extending a two-week rising streak. Yields on 30-year U.S. bonds were only slightly higher, flattening the gap between five-year and 30-year debt to its narrowest level since early 2020. Raymond James market strategist Ellis Phifer said the higher mid-term yields showed investors positioning for higher rates, while maintaining confidence the U.S. Federal Reserve will be able to control long-term inflation. "The market gives the Fed credit for fighting inflation, so you don’t see the long end of the curve get out of control," he said. Latest weekly positioning data showed hedge funds have increased their short bets on 2 and 5 year U.S. Treasuries while simultaneously increasing their bullish bets on 10-year debt, indicating investors expect this curve flattening trend to extend in the coming months. Yields on benchmark 10-year U.S. debt were up 4.4 basis points at 1.6195%. U.S. Treasuries had sold off last week on strong U.S. retail sales data and hawkish comments from some Fed speakers but Jefferies analysts believe it encouraged some investors to add new short bets on U.S. bonds. U.S. retail sales rose 0.7% last month and data for August was revised higher to show retail sales increased 0.9% instead of 0.7% as initially reported by the Commerce Department. The 10-year TIPS breakeven rate was last at 2.56%, hovering near a five-month high indicating the market sees inflation averaging almost 2.6% a year for the next decade. Money markets now attach a 40% probability of one 25 bps rate hike by the U.S. Federal Reserve by September 2022 compared to a 24% probability a month earlier, according to CME data. October 18 Monday 9:49AM New York / 1349 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0525 0.0532 0.005 Six-month bills 0.0575 0.0583 0.000 Two-year note 99-167/256 0.4294 0.028 Three-year note 99-168/256 0.7415 0.043 Five-year note 98-140/256 1.1782 0.056 Seven-year note 98-144/256 1.4684 0.057 10-year note 96-168/256 1.6195 0.044 20-year bond 95-100/256 2.0336 0.018 30-year bond 98-204/256 2.0541 0.004 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 16.00 1.50 spread U.S. 3-year dollar swap 15.50 1.00 spread U.S. 5-year dollar swap 6.75 -0.50 spread U.S. 10-year dollar swap 0.25 -0.25 spread U.S. 30-year dollar swap -23.00 0.75 spread (Reporting by Saikat Chatterjee and Ross Kerber; editing by Philippa Fletcher and Nick Zieminski)