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TREASURIES-U.S. yields up on inflation, 2-year highest since 2008 crisis

* Consumer price inflation highest in 11 months

* Two-year yields hit highest since 2008

* U.S. retail sales rose in December, November's revised higher

NEW YORK, Jan 12 (Reuters) - Treasury yields climbed on Friday as underlying U.S. consumer prices rose the most in 11 months in December, bolstering expectations of a pickup in domestic inflation and Federal Reserve interest rate hikes this year. The two-year yield, which is sensitive to traders' views on interest rates, rose to more than 2 percent for the first time since the financial crisis. "This probably does heighten the chances of, at least incrementally, a move in March at the first meeting Powell will chair," said Lou Brien, market strategist at DRW Trading in Chicago, referring to incoming Federal Reserve Chair Jerome Powell. The U.S. Senate Banking Committee will hold a second vote on Jan. 17 on President Donald Trump's nomination of Powell to lead the central bank. The U.S. 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 accommodations and healthcare. In the past year, inflation has remained stubbornly lower than the Fed's target rate of 2 percent, despite strong gross domestic product growth and employment data. In a separate report on Friday, the U.S. Commerce Department said retail sales rose in December and it revised sales growth in November higher, suggesting the economy exited 2017 with strong momentum. Euro zone bond yields were lower at midday on Friday, with German yields pulling back from five-month peaks after the European Central Bank's Jens Weidmann played down the risk of an imminent rate hike. The yield of U.S. benchmark bonds fell in step with Europe, but remained above Thursday's close.

In U.S. government news, Treasury Secretary Steven Mnuchin said on Friday he believed the Republican tax cuts will ultimately become revenue neutral over 10 years because of higher growth but that the Treasury will likely ask Congress for more money to implement the tax plan. Next week's schedule for data releases is light, so the market will likely focus on Washington. As the continuing resolution expires Friday, investors will be watching Congress to see if it can put together a funding bill in time to avoid a government shutdown. At 2:13 p.m. (1913 GMT), the yield on 10-year government notes was 2.554 percent, up from 2.531 percent at Thursday's close. The yield on two-year government bills hit a high of 2.026 percent, its highest since September 2008, before falling slightly to 2.002 percent at 2:13 p.m. EST.

Friday, Jan. 12 at 1434 EST (1934 GMT): Price

US T BONDS MAR8 150-12/32 -0-2/32 10YR TNotes MAR8 122-236/256 -0-52/256 Price Current Net Yield Change (pct) (bps) Three-month bills 1.42 1.4446 0.008 Six-month bills 1.5675 1.6016 0.013 Two-year note 99-194/256 2.0017 0.029 Three-year note 99-170/256 2.1162 0.030 Five-year note 98-246/256 2.3482 0.034 Seven-year note 98-136/256 2.4811 0.027 10-year note 97-96/256 2.5535 0.023 30-year bond 97-204/256 2.8602 -0.003

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 19.00 0.50

spread

U.S. 3-year dollar swap 18.00 1.00

spread

U.S. 5-year dollar swap 4.50 0.25

spread

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

spread

U.S. 30-year dollar swap -19.75 1.25

spread