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TREASURIES-U.S. Treasury yields edge up before next week's Fed meeting

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(Adds comment, fresh prices) By Herbert Lash NEW YORK, July 23 (Reuters) - Treasury yields rose on Friday ahead of the Federal Reserve's policy-setting meeting next week, which will provide clues on the strength of the U.S. recovery and when the central bank might start to curb its economic support. The yield on 10-year Treasury notes hovered just below 1.3%, or almost 17 basis points higher than a five-month low set Tuesday, but still at the low end of a recent range. The benchmark note traded up 2.1 basis points at 1.288% after briefly rising above 1.3%. The yield on the 30-year Treasury bond rose 2.2 basis points to 1.925%. The Treasury market has gone from oversold to overbought and is seeking equilibrium as fears ebb that the COVID-19 Delta variant would lead to lockdowns and slow the economy, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities. "What we're really seeing take place is a good deal of speculative flavor in a very, very thin market," Ricchiuto said. "The market has to go back and find a more realistic level and that's what it is attempting to do right now." The specter of renewed lockdowns and the Fed's insistence that inflation will remain within its new 2% target spurred a sharp rally in Treasury prices, which move inversely to yields. But the durability of that rally, given expectations for improving fundamentals through this year, is questionable barring renewed lockdowns, said Jonathan Cohn, trading strategist at Credit Suisse Securities (USA) LLC. "We continue to believe yields ought to go higher but at this point think it's prudent to be more tactical with entry points and holding periods as the market attempts to find an equilibrium," he said. Real yields are close to record lows and the market is questioning whether the Fed can hike more than a couple of times given tapering is actively discussed, with inflation data surprising on the upside, Cohn said. This "speaks to that need to be tactical and respect some of the puzzling price action in rates," he said. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 108.3 basis points. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was unchanged at 0.202%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.543%. The 10-year TIPS breakeven rate was last at 2.332%, indicating the market sees the consumer price index averaging at that rate annually for the next decade. July 23 Friday 2:41PM New York / 1841 GMT Price Current Net Yield % Change (bps) Three-month bills 0.05 0.0507 0.003 Six-month bills 0.05 0.0507 0.000 Two-year note 99-218/256 0.2021 0.000 Three-year note 100 0.375 0.000 Five-year note 100-192/256 0.7198 0.008 Seven-year note 101-112/256 1.0345 0.016 10-year note 103-24/256 1.288 0.021 20-year bond 106-164/256 1.848 0.023 30-year bond 110-44/256 1.9248 0.022 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.00 0.00 spread U.S. 3-year dollar swap 10.50 0.50 spread U.S. 5-year dollar swap 8.50 0.25 spread U.S. 10-year dollar swap -0.50 -0.50 spread U.S. 30-year dollar swap -27.25 -0.50 spread (Reporting by Herbert Lash; Editing by Dan Grebler and Richard Chang)

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