TREASURIES-U.S. yields rise as inflation worry simmers

(Updates prices, adds details on 3-year auction, Harker comments) By Chuck Mikolajczak NEW YORK, May 11 - U.S. Treasury yields climbed on Tuesday as inflation concerns helped drive a sell-off in equity markets while investors girded for a closely watched reading on consumer prices on Wednesday. Yields on longer-dated Treasuries were up for a third straight day, with the yield on 10-year Treasury note up 2.1 basis points at 1.624%. Investors awaited Wednesday's April consumer price index data to see if the U.S. Federal Reserve will begin to alter its stance on inflation. The Fed has repeatedly maintained that any inflation would be transitory in nature. On Tuesday, Cleveland Federal Reserve Bank President Loretta Mester said she expected inflation to end the year above 2% but to come down next year as supply constraints ebb. Philadelphia Fed President Patrick Harker said there are sill factors slowing down the recovery in the labor market, and believes the central bank should continue to provide support to the economy. "(The Fed) have made it very clear that they think it is transitory and ongoing price increases will continue to be transitory but we are not going to know if they are right about that until much further down the road," said Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis. "In the meantime the market is going to make up their own mind and whether investors believe that inflation is transitory is going to make a significant difference in how assets trade and whether the market starts to challenge the Fed to move faster than the Fed would like." The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.695%, after closing at 2.717% on Monday, its highest close in just over a decade. The 10-year TIPS breakeven rate was last at 2.539%, indicating the market sees inflation averaging 2.5% a year for the next decade. The inflation concerns were felt in equity markets, which saw declines in 10 of 11 S&P sectors, although major indexes had recovered from their worst levels of the session. The yield on 30-year Treasury bond was up 3.5 basis points at 2.354%. A $58 billion auction of three-year notes went well, with a high-yield of 0.329%, and analysts noted demand was decent. In addition to the three-year auction, more supply will be headed to the market this week in the form of $41 billion in 10-year notes on Wednesday and $27 billion of 30-year bonds on Thursday. May 11 Tuesday 3:07PM New York / 1907 GMT Price US T BONDS JUN1 156-31/32 -0-18/32 10YR TNotes JUN1 132-120/256 -0-36/25 6 Price Current Net Yield % Change (bps) Three-month bills 0.015 0.0152 -0.003 Six-month bills 0.035 0.0355 0.001 Two-year note 99-238/256 0.1608 0.008 Three-year note 100-50/256 0.3079 0.011 Five-year note 99-192/256 0.8014 0.019 Seven-year note 99-216/256 1.2735 0.018 10-year note 95-132/256 1.6235 0.021 30-year bond 89-204/256 2.3537 0.035 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 9.50 -0.25 spread U.S. 3-year dollar swap 12.50 0.25 spread U.S. 5-year dollar swap 8.00 -0.25 spread U.S. 10-year dollar swap -3.00 0.25 spread U.S. 30-year dollar swap -30.00 -0.25 spread (Reporting by Chuck Mikolajczak; Editing by Richard Chang and Nick Zieminski)