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TREASURIES-Benchmark yields hit 3-year peak as government shutdown looms

(Updates quotes, prices and news throughout)

* 10-year yields hit highest level since September 2014

* Deadline for U.S. government funding bill approaching

NEW YORK, Jan 19 (Reuters) - Yields on the 10-year U.S. government note hit a three-year high on Friday as weakness in overnight trading led the debt to test key technical support levels, before the higher yields attracted new buyers. "This is one of those times when the price action is deciding further price action," said Michael Lorizio, senior fixed income trader at Manulife Asset Management in Boston. The higher yields "probably brought in enough buying interest to cause a little bit of a reversal, but not enough," Lorizio added, noting yields were holding just below Friday's earlier high. The benchmark 10-year yield hit its highest level since September 2014 on Friday, at 2.646 percent, breaking the 2017 record of 2.64 percent which the market had been flirting with all week. Some analysts had doubts that yields would break through that barrier. "I think the market's getting ahead of itself," said Justin Hoogendoorn, head of fixed income strategy at Piper Jaffray & Co in Chicago. A strong equity market and increasing expectations of inflation have sent 10-year yields higher this week. But that pressure may be short-lived. "I think the run-up in commodities has played a big role in increasing inflation expectations," Hoogendoorn said. Brent crude futures on Monday hit their highest level since December 2014, at $70.37, before falling to $68.55 on Friday.

Analysts said news about the potential U.S. government shutdown was not influencing the market. "History tells us that it doesn't have a major economic impact on a longer-term basis," Lorizio said. The U.S. Senate was racing to avert a government shutdown on Friday ahead of a midnight deadline with no agreement on funding in sight and both parties squabbling over who is to blame for the impasse. At 2:18 p.m. (1918 GMT), 10-year Treasury yields were at 2.635 percent. The two-year's were at 2.056 percent after hitting 2.065 percent earlier in the day, the highest level since September 2008.

January 19 Friday 2:29PM New York / 1929 GMT Price

US T BONDS MAR8 149 -0-14/32 10YR TNotes MAR8 122-72/256 -0-44/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.4075 1.4319 -0.008 Six-month bills 1.59 1.6249 -0.008 Two-year note 99-168/256 2.0564 0.013 Three-year note 99-116/256 2.1905 0.023 Five-year note 98-146/256 2.4338 0.024 Seven-year note 98 2.5664 0.025 10-year note 96-172/256 2.637 0.026 30-year bond 96-204/256 2.9113 0.023

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 20.00 -0.50

spread

U.S. 3-year dollar swap 19.00 -0.50

spread

U.S. 5-year dollar swap 7.00 1.25

spread

U.S. 10-year dollar swap 3.75 2.75

spread

U.S. 30-year dollar swap -13.00 3.50

spread

(Reporting by Kate Duguid; Editing by Lisa Von Ahn and Leslie Adler)