TREASURIES-U.S. yields up after inflation data as investors await Fed meeting

(Adds details, prices, quotes) By Davide Barbuscia NEW YORK, Jan 27 (Reuters) - U.S. Treasury yields were higher on Friday after inflation data in Japan surprised on the upside and following the release of the Federal Reserve's favored inflation measure, the Personal Consumption Expenditures (PCE) index, which was in line with expectations. Government bond yields - which move inversely to prices - have been rangebound over the past few days as investors await clues on monetary policy from the Federal Reserve at its interest rate-setting meeting next week. Price moves meanwhile have been mainly determined by economic data which painted a mixed picture. Economic output data on Thursday, as well as labor market figures, surprised on the upside, showing strength in the U.S. economy despite the swift rise in interest rates by the Fed last year, aimed at curbing rampant inflation. On the other hand, data released from the Commerce Department on Friday showed consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 0.2% last month. On the inflation side, the so-called core PCE price index rose 4.4% on a year-on-year basis in December after increasing 4.7% in November. The Fed tracks the PCE price indexes for monetary policy, and other inflation measures have also slowed down significantly. "The core PCE came in line with expectations and there was no downside beat that we've become accustomed to with recent (inflation) prints," said Thomas Hayes, chairman and managing member of New York-based Great Hill Capital. For Paul Ashworth, chief North America economist at Capital Economics, the slump in spending showed that the U.S. economy was on the verge of a recession. "With higher interest rates evidently weighing heavily on demand now, we expect core inflation to continue moderating this year, which will eventually persuade the Fed to begin cutting interest rates late this year," he said in a note. Traders of futures tied to the Fed's policy rate kept bets on Friday that the U.S. central bank will raise interest rates just once more beyond next week's widely expected quarter-point hike before stopping. They were pricing for the benchmark rate to peak at about 4.91% in June, before declining to 4.46% in December. Yields declined marginally immediately after the PCE data but they pared losses and were higher on the day after data overnight showed core consumer prices in Tokyo, a leading indicator of nationwide trends, rose 4.3% in January from a year earlier, marking the fastest annual gain in nearly 42 years . Benchmark 10-year yields were up about five basis points at 3.54%, while two-year yields were up about four basis points to 4.219%. Key parts of the yield curve remained deeply inverted, reflecting concerns about an imminent recession. The two-year, 10-year curve was last at minus 68.1 basis points, while the spread between three-month and 10-year yields was at minus 114 basis points. January 27 Friday 10:17AM New York / 1517 GMT Price Current Net Yield % Change (bps) Three-month bills 4.5625 4.6774 0.008 Six-month bills 4.6675 4.8441 0.011 Two-year note 99-210/256 4.2196 0.042 Three-year note 99-218/256 3.9281 0.045 Five-year note 99-90/256 3.643 0.055 Seven-year note 99-100/256 3.5993 0.056 10-year note 104-204/256 3.5404 0.049 20-year bond 102-224/256 3.7918 0.033 30-year bond 106-24/256 3.662 0.034 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 27.75 0.00 spread U.S. 3-year dollar swap 14.00 0.50 spread U.S. 5-year dollar swap 6.25 0.25 spread U.S. 10-year dollar swap -2.75 0.25 spread U.S. 30-year dollar swap -37.50 0.75 spread (Reporting by Davide Barbuscia; Editing by Raissa Kasolowsky and Andrea Ricci)