TREASURIES-Traders rethink CPI message and send down yields

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(Recasts and updates with market activity, analyst comment) By Ross Kerber June 10 (Reuters) - Investors reversed course and sent longer-term U.S. Treasury yields lower during a see-saw trading session on Thursday, suggesting an embrace of the view that inflationary pressures are temporary. The benchmark 10-year yield was down 2.2 basis points at 1.4671% in afternoon trading, near its low for the session and the least since March. The yield had trended down from a high of 1.535% on Thursday morning, reached soon after the U.S. Labor Department said its consumer price index increased 0.6% last month after surging 0.8% in April. Separately, the department said initial claims for state unemployment benefits fell to their lowest level in 15 months. The drop in yields after the initial surge showed the market growing more comfortable with the message from U.S. Federal Reserve officials that inflationary pressures are temporary as the U.S. economy reopens quickly, said Andy Richman, Sterling Capital Management managing director. "It's buying into the Fed's wait-and-see approach," Richman said. The trading moved down the 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. It was at 131 basis points, about 2 basis points lower than Wednesday's close and also its lowest since March. Demand for 30-year bonds sold at auction at 1 p.m. was "mixed," according to a note from BMO Capital Markets rates strategist Ben Jeffery, with a bid-to-cover ratio of 2.29 versus an average of 2.38. The 10-year TIPS yield was at -0.889% and the breakeven inflation rate was at 2.348%. The amount of money flowing into the Fed's reverse repurchase facility was nearly $535 billion, the fourth day in a row it hit a record high and putting pressure on short-term interest rates. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down less than a basis point at 0.1508%. The yield on the one-month bill was at 0.0025%, the lowest since May when it touched 0% for the first time since March 2020. June 10 Thursday 1:57 PM New York / 1757 GMT Price Current Net Yield % Change (bps) Three-month bills 0.025 0.0253 0.000 Six-month bills 0.04 0.0406 0.000 Two-year note 99-243/256 0.1508 -0.004 Three-year note 99-214/256 0.305 -0.008 Five-year note 100-18/256 0.7356 -0.009 Seven-year note 100-172/256 1.1494 -0.017 10-year note 101-116/256 1.4671 -0.022 20-year bond 102-192/256 2.0807 -0.015 30-year bond 104-176/256 2.1614 -0.007 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 6.75 0.25 spread U.S. 3-year dollar swap 9.00 0.75 spread U.S. 5-year dollar swap 7.00 0.00 spread U.S. 10-year dollar swap -2.75 0.25 spread U.S. 30-year dollar swap -30.25 -0.50 spread (Reporting by Ross Kerber in Boston Editing by Chizu Nomiyama)