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TREASURIES-U.S. yields rise before 30-year bond sale

* U.S. to sell $12 billion 30-year bond at 1 p.m.

* Producer prices post biggest annual rise in nearly 6 years

* Two-year yield touches highest level since October 2008

(Recasts; updates prices, adds comment, table) NEW YORK, Dec 12 (Reuters) - U.S. Treasury yields rose on Tuesday as investors reduced their debt holdings in advance of a $12 billion auction of 30-year government bonds and after stronger-than-forecast data on producer prices in November. The two-year yield reached its highest level in more than nine years as traders anticipated an interest rate increase from the Federal Reserve 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. In the meantime, the Treasury will sell $12 billion worth of 30-year bonds at 1 p.m. (1800 GMT) following mixed reception to three-year and 10-year notes on Monday. Some investors would like to see higher yields on the latest 30-year supply, which was quoted at about 2.79 percent in the "when issued" market. "We need a bit of concession for the 30-year," Rajappa said. "Given the recent demand for long-duration assets, it might still go okay." At 10:33 a.m. (1533 GMT), the 10-year Treasury yield was 2.410 percent, up 3 basis points from late on Monday, while the 30-year yield rose 3 basis points to 2.800 percent. Two-year yields were up more than 2 basis points at 1.847 percent, which was the highest since October 2008, Reuters data showed. December 12 Tuesday 10:39AM New York / 1539 GMT Price

US T BONDS MAR8 152-13/32 -0-20/32 10YR TNotes MAR8 124-16/256 -0-52/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.32 1.3429 0.049 Six-month bills 1.46 1.4913 -0.003 Two-year note 99-208/256 1.8475 0.025 Three-year note 99-184/256 1.972 0.035 Five-year note 99-36/256 2.1835 0.026 Seven-year note 98-184/256 2.3253 0.027 10-year note 98-144/256 2.4137 0.029 30-year bond 98-252/256 2.8003 0.028 YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 56.50 -0.05 30-year vs 5-year yield 61.60 -0.20

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 19.00 0.00

spread

U.S. 3-year dollar swap 16.50 -1.00

spread

U.S. 5-year dollar swap 6.25 0.25

spread

U.S. 10-year dollar swap 1.25 0.25

spread

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

spread

(Reporting by Richard Leong; Editing by Meredith Mazzilli)