TREASURIES-U.S. yields climb amid robust inflation, rate hike expectations

* Inflation data highest in 11 months

* Two-year yields hit highest since 2008

* U.S. retail sales rise; core sales revised higher

NEW YORK, Jan 12 (Reuters) - Treasury yields climbed on Friday as underlying U.S. consumer prices posted their biggest gain in 11 months in December, bolstering expectations about a pickup in domestic inflation and about Federal Reserve interest rate hikes this year. The two-year yield, which is sensitive to traders' views on interest rates, jumped over 2 percent to its highest since September 2008. "One of the things thats been driving the market is an expectation that inflation may start to pick up or at least normalize this year and encourage the Fed to continue along its (monetary policy) tightening path, and todays data surprised to the upside," said Michael Pond, head of global inflation-linked research at Barclays in New York. The Labor Department said its Consumer Price Index, excluding the volatile food and energy components, rose 0.3 percent last month, amid strong gains in the cost of rental accommodation and healthcare. The suggestion that inflation may be rising also kicked up the 10-year yield, an indication of the market's long-term confidence in the economic health of the United States. In the past year, inflation has remained stubbornly lower than the Fed's target rate of 2 percent, even amid strong gross domestic product growth and employment data. The yield curve briefly steepened on the data, with the gap between yields on two-year notes and 10-year notes rising to 57 basis points, before falling back to 55 basis points, little changed on the day. In a separate report on Friday, the U.S. Commerce Department said retail sales rose in December as households bought a range of goods, and figures for the prior month were revised higher, suggesting the economy exited 2017 with strong momentum. The retail data bolsters economists' expectations of an acceleration in consumer spending in the fourth quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.2 percent annualized rate in the third quarter. At 9:36 a.m. (1336 GMT), the yield on 10-year government notes was 2.570 percent, up from 2.531 percent at Thursday's close. The yield on two-year government bills hit a high 2.026 percent, before falling slightly to 2.013 percent at 9:37 a.m.(1437 GMT).

January 12 Friday 9:45AM New York / 1445 GMT Price

US T BONDS MAR8 150 -0-14/32 10YR TNotes MAR8 122-212/256 -0-76/25


Price Current Net Yield % Change


Three-month bills 1.4225 1.4472 0.010 Six-month bills 1.5775 1.6119 0.023 Two-year note 99-190/256 2.0099 0.037 Three-year note 99-164/256 2.1244 0.038 Five-year note 98-234/256 2.3584 0.044 Seven-year note 98-116/256 2.4935 0.039 10-year note 97-64/256 2.5682 0.037 30-year bond 97-104/256 2.8801 0.017


Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 19.00 0.50


U.S. 3-year dollar swap 17.75 0.75


U.S. 5-year dollar swap 4.25 0.00


U.S. 10-year dollar swap -1.00 0.25


U.S. 30-year dollar swap -20.00 1.00


(Editing by Bernadette Baum)