TREASURIES-Longer-term yields climb, curve steepens - Reuters

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 (Recasts, updates yields, adds comments from analyst and Fed
officials)
    By Karen Pierog
    CHICAGO, Jan 5 (Reuters) - Longer-term U.S. Treasury yields
shot higher and the yield curve steepened on Tuesday as the
market awaited the outcome of Georgia elections that will
determine which party controls the U.S. Senate.
    The benchmark 10-year yield was last up 3.1
basis points at 0.9482%. 
    The spread between five-year notes and 30-year bonds
 hit its widest level since November 2016 at 134.73
basis points. It was last at 132.38 basis points.
    Yields got a lift earlier in the session on
stronger-than-expected data that showed U.S. manufacturing
activity rose in December to its highest level since August
2018. The Institute for Supply Management said its index of
national factory activity rebounded to a reading of 60.7 last
month, up from 57.5 in November.
    Inflation expectations creeping higher and the potential
tapering off of assets purchases by the U.S. Federal Reserve
were additional catalysts for the jump in yields, according to
Stan Shipley, fixed income strategist at Evercore ISI in New
York.
    Atlanta Fed President Raphael Bostic said on Monday that the
Fed could begin to trim its monthly asset purchases this year if
distribution of coronavirus vaccines boosts the economy.
 Cleveland Fed President Loretta Mester said on
Tuesday that a reduction in purchases could be possible next
year, depending on the state of the economy.
    On Monday, the 10-year Treasury Inflation Protected
Securities (TIPS) yield touched a record low of -1.113% reached
in September, while the 10-year TIPS breakeven inflation rate
topped 2% for the first time since November 2018.
    "The drop in real yields and the increase in breakevens has
been a sign of a little bit of optimism that we will start to
see inflation begin to pick up," said Ben Jeffery, a strategist
at BMO Capital Markets in New York.
    Mester also said the Fed also needs to remain accommodative
to boost inflation, which is unlikely to move quickly past the
central bank's 2% average target.
   Meanwhile, Georgia residents were casting their votes in
runoff elections for two Senate seats.
    Continued split control of Congress, with a Republican
majority in the Senate and Democratic control of the House of
Representatives, would hinder substantial fiscal measures, which
would help keep Treasury yields in check, according to analysts.
Democratic victories in Georgia could push longer-term yields
higher if supply increases to fund more stimulus.
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was last up less
than a basis point at 0.123%.
    The most closely watched part of the yield curve, the gap
between yields on two- and 10-year Treasury notes,
was last 2.41 basis points higher at 82.35 basis points.
    January 5 Tuesday 3:26PM New York / 2126 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.0825       0.0837    -0.007
 Six-month bills               0.085        0.0862    -0.008
 Two-year note                 100-1/256    0.123     0.008
 Three-year note               99-222/256   0.1703    0.008
 Five-year note                100-2/256    0.3734    0.019
 Seven-year note               99-190/256   0.6628    0.025
 10-year note                  99-80/256    0.9482    0.031
 20-year bond                  98-8/256     1.4899    0.043
 30-year bond                  98-72/256    1.6986    0.043
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap         6.75        -0.50    
 spread                                               
 U.S. 3-year dollar swap         6.75        -0.25    
 spread                                               
 U.S. 5-year dollar swap         6.25        -0.25    
 spread                                               
 U.S. 10-year dollar swap       -0.75        -0.75    
 spread                                               
 U.S. 30-year dollar swap      -26.50        -1.00    
 spread (Reporting by Karen Pierog; editing by Jonathan Oatis)
  

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