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TREASURIES-U.S. yields rise as producer price data offsets 30-year auction

* U.S. sell $12 billion 30-year bond to steady demand Producer prices post biggest annual rise in nearly 6 years

* Two-year yield touches highest level since October 2008

(Updates market action, adds quote) NEW YORK, Dec 12 (Reuters) - U.S. Treasury yields rose on Tuesday as stronger-than-forecast data on producer prices in November offset average demand at a $12 billion auction of 30-year bonds. The two-year yield reached its highest level in more than nine years as traders anticipated an interest rate increase from the Federal Reserve to 1.25-1.50 percent at its two-day policy meeting that ends on Wednesday. "The focus for the market right now will be on the data and the Fed," said Subadra Rajappa, head of U.S. rates strategy at SG Corporate & Investment Banking in New York. Earlier on Tuesday, the U.S. government said producer prices rose at a 12-month clip of 3.1 percent, the largest such gain since January 2012, supporting the view of a broad pickup in inflation. Stubbornly low inflation has kept the Fed on a gradual path in increasing borrowing costs and reducing its balance sheet. Investors awaited November figures on consumer prices, which are due at 8:30 a.m. (1330 GMT) on Wednesday, for confirmation that inflation is accelerating. "The strength of the PPI will be viewed as a positive for the CPI number," Rajappa said. Economists polled by Reuters forecast the consumer price index likely grew by 0.4 percent last month, bringing its year-over-year increase to 2.2 percent. Evidence that price growth is picking up may allow the Fed to raise short-term rates at a faster pace, analysts said. Interest rates futures implied traders are pricing in two quarter-point rate hikes next year, one fewer than what Fed officials had expected at the September policy meeting. "Tomorrow's rate hike is a done deal. If the CPI is strong, it raises the question on the how many hikes in 2018," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. On the supply front, the Treasury sold $12 billion worth of 30-year bonds to steady demand following a mixed reception to three-year and 10-year notes on Monday. "It was a fair auction," Cantor's Lederer said. Bond yields retreated from their session highs following the 30-year auction. The 10-year Treasury yield was 2.407 percent, up 2.2 basis points from late on Monday, while the 30-year yield increased 1.5 basis points to 2.787 percent. Two-year yields edged up 0.8 basis point at 1.831 percent after touching 1.847 percent which was the highest since October 2008, Reuters data showed.

Tuesday, Dec. 12 at 1425 EST (1925 GMT): Price

US T BONDS MAR8 152-18/32 -0-15/32 10YR TNotes MAR8 124-32/256 -0-36/256 Price Current Net Yield Change (pct) (bps) Three-month bills 1.32 1.3429 0.049 Six-month bills 1.455 1.4861 -0.008 Two-year note 99-216/256 1.8312 0.008 Three-year note 99-196/256 1.9558 0.019 Five-year note 99-48/256 2.1735 0.016 Seven-year note 98-200/256 2.3154 0.017 10-year note 98-160/256 2.4065 0.022 30-year bond 99-60/256 2.7878 0.016 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 57.20 0.75 30-year vs 5-year yield 61.40 -0.40

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 19.50 0.50

spread

U.S. 3-year dollar swap 16.75 -0.75

spread

U.S. 5-year dollar swap 6.00 0.00

spread

U.S. 10-year dollar swap 1.00 0.00

spread

U.S. 30-year dollar swap -19.75 0.25

spread

(Reporting by Richard Leong; Editing by Meredith Mazzilli and Chizu Nomiyama)