TREASURIES-Yields mostly up after stronger-than-expected U.S. producer prices

NEW YORK, April 10 (Reuters) - U.S. Treasury yields on Tuesday were mostly higher after the latest data showed a pick-up in inflation last month in terms of producer prices, which rose more than expected. However, U.S. 30-year yields, which move inversely to prices, inched lower as the yield curve continued to flatten as investors priced-in interest rates hikes this year. The U.S. 5-year and U.S. 30-year yield curve has flattened to 39.6 basis points. That's the narrowest gap since late December 2011. "The front-end continues to be under a little bit of pressure. We got some positive data on the PPI (producer prices index) front," said Subadra Rajappa, head of U.S. rates strategy, at Societe Generale in New York. "We have inflation data coming tomorrow and the key focus for the market is whether there would be confirmation of a sustained path to the higher inflation," she added. Data showed on Tuesday that U.S. producer prices increased more than expected in March, boosted by a rise in the cost of services such as healthcare and airline fees. The producer price index for final demand rose 0.3 percent last month after increasing 0.2 percent in February. Risk appetite was also on the mend on Tuesday after Chinese President Xi Jinping set a positive tone for easing trade tensions between the United States and China. He promised to open the country's economy further and lower import tariffs on products including cars. That boosted Wall Street stocks, but was hardly a factor in the Treasury market, analysts said, as investors focused on the U.S. inflation outlook with both producer and consumer prices on tap this week. In mid-morning trading, the U.S. 10-year yields were up slightly at 2.797 percent, from 2.789 percent late on Monday. U.S. 30-year yields, however, slipped to 3.015 percent , from Monday's 3.017 percent. On the front end of the curve, U.S. 2-year yields edged up to 2.302 percent, compared with 2.286 percent on Monday. U.S. 3-year yields also inched higher to 2.435 percent , from Monday's 2.419 percent. The U.S. Treasury is also set to auction later on Tuesday $30 billion in U.S. 3-year notes. Action Economics noted in its blog that the sale could see lukewarm demand, noting that U.S. auctions of late haven't fared as well as those in Europe. "Demand for Treasuries has generally been waning over the past 12 months, with headwinds coming from the Fed's tightening rate posture and balance sheet unwinds, factors which have often overshadowed higher rates," Action Economics said.

April 10 Tuesday 10:26AM New York / 1426 GMT Price

US T BONDS JUN8 145-31/32 -0-3/32 10YR TNotes JUN8 120-200/256 -0-32/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.715 1.7465 -0.002 Six-month bills 1.885 1.9296 0.003 Two-year note 99-228/256 2.3069 0.021 Three-year note 99-208/256 2.4415 0.023 Five-year note 99-114/256 2.6197 0.019 Seven-year note 99-72/256 2.7389 0.018 10-year note 99-152/256 2.7972 0.011 30-year bond 99-164/256 3.0182 0.001

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 30.25 -0.50

spread

U.S. 3-year dollar swap 24.50 -0.75

spread

U.S. 5-year dollar swap 12.75 -0.25

spread

U.S. 10-year dollar swap 2.25 0.00

spread

U.S. 30-year dollar swap -15.25 0.75

spread

(Reporting by Gertrude Chavez-Dreyfuss Editing by Nick Zieminski)