TREASURIES-U.S. yields climb as vaccine update weighed against Omicron spread

(Adds auction results, updates prices)

By Chuck Mikolajczak

NEW YORK, Dec 8 (Reuters) - The benchmark U.S. 10-year Treasury yield rose modestly on Wednesday, as investors weighed encouraging vaccine news on the new Omicron variant against the rapid spread of cases.

Drugmakers Pfizer and BioNtech said a three-shot course of their COVID-19 vaccine was shown to generate a neutralizing effect against the variant in a laboratory test.

The yield on 10-year Treasury notes was up 2.8 basis points to 1.508%. The three-day climb in yields marks the longest streak of gains since mid-October.

The yield on the 10-year had its biggest weekly drop since June 2020 last week after comments from Federal Reserve Chair Jerome Powell took a more hawkish tone and concerns over the Omicron variant rattled markets. The central bank is scheduled to hold its final policy meeting of the year next week.

"What we are starting to see is a degree of migration away from a forced positioning in the wake of Omicron’s initial reporting plus month-end and we are in this shoulder period between that phenomenon and a really important signal from the Fed on Wednesday," said Eric Freedman, chief investment officer at U.S. Bank Wealth Management in Minneapolis.

The variant has been reported in 57 countries and the number of patients that will need hospitalization is likely to climb as it spreads, said the World Health Organization.

But comments from an official in South Africa and top U.S. infectious disease expert Dr. Anthony Fauci in recent days downplaying the severity of the variant have helped spur an appetite for risk, with the S&P 500 rising more than 3% in the past two trading sessions.

An auction of $36 billion in 10-year notes by the Treasury was viewed as average by analysts. Demand for the debt was at the lower end of the recent range at 2.43 times the notes on sale.

The yield on the 30-year Treasury bond was up 7.9 basis points to 1.874%. The Treasury will auction $22 billion of the bond on Thursday.

Later in the week, investors will get a look at the November consumer price index to gauge inflationary pressures.

The 6-month bill's yield touched 0.16%, its highest since July 16, 2020, before backing off and was down 1.6 basis points to 0.129% as investors attempt to price in the first rate hike from the Fed.

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 82.7 basis points, after narrowing to as little as 76.4 on Tuesday.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1 basis point at 0.680%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.891%, after closing at 2.86% on Tuesday.

The 10-year TIPS breakeven rate was last at 2.548%, indicating the market sees inflation averaging 2.5% a year for the next decade.

The U.S. dollar 5 years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.407%. (Reporting by Chuck Mikolajczak; Editing by Andrea Ricci)