TREASURIES-US yields retreat as markets keep bets on end of Fed hikes, ahead of auction

By Gertrude Chavez-Dreyfuss NEW YORK, Nov 7 (Reuters) - U.S. Treasury yields fell on Tuesday, with those on benchmark 10-year notes dropping in five of the last six sessions, as bond investors continued to price in expectations that the Federal Reserve is near the end of its tightening cycle. The slide in yields on the long end of the curve was much sharper than those on the short end in what is called a "bull flattener", a scenario which normally precedes a cut in interest rates by the Fed. A bull flattener typically happens when the market pares back inflation expectations. The two-year/10-year yield curve was last at -34.09 basis points (bps), flattening further from Monday after weeks of steepening. "People now expect that we have seen the last of the Fed hikes here," said Stan Shipley, managing director and macro research analyst at Evercore ISI in New York. "Sometime by January or February, the Fed will declare victory on inflation. It's not clear what it would take for the Fed to actually cut rates here, but at least we're not getting more hikes," he added. U.S. rate futures have priced in on Tuesday a 52% chance of a rate cut next May, according to the CME's FedWatch tool. A week ago, those odds were at 29.4%. Investors also sold Treasuries ahead of a $48 billion auction of U.S. three-year notes, $2 billion higher than the October sale. The auction last month saw weaker-than-expected demand for this note. BMO Capital Markets in a research note said the sale this time could be more well received than the last. "We expect the second-tier nature of this week's data calendar and relatively limited near-term event risk bodes well for a lower volatility trading environment that may inspire a greater willingness to add U.S. rates exposure after the heavy slate of new fundamental information revealed in the week just passed," the bank wrote. Ahead of the auction, U.S. three-year note yields were down 2.9 basis points (bps) at 4.713%. The yield on benchmark 10-year Treasury notes was down 7.5 bps at 4.587%. U.S. 30-year yields were dropped 9.1 bps to 4.740%. U.S. two-year yields, which tend to reflect interest rate expectations slipped to 4.930%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS)> was last at 2.337%. This inflation metric has been on downward trend since around mid-October. Fed officials on Tuesday gave out mixed messages on inflation. Chicago Fed President Austan Goolsbee said the U.S. central bank has made significant inroads in its battle to bring inflation down to its 2% target, and attention will turn to how long to keep interest rates at their current level if that progress continues. Minneapolis Fed Bank President Neel Kashkari, for his part, said the Fed may have to do more to bring inflation down to its 2% goal, given the recent spate of resilient economic data. November 7 Tuesday 10:55 AM New York/1555 GMT Price Current Net Yield % Change (bps) Three-month bills 5.2825 5.444 0.018 Six-month bills 5.265 5.4991 0.000 Two-year note 100-31/256 4.9343 -0.007 Three-year note 99-192/256 4.7161 -0.026 Five-year note 101-100/256 4.5593 -0.050 Seven-year note 101-160/256 4.5999 -0.062 10-year note 94-108/256 4.5892 -0.073 20-year bond 93-20/256 4.9263 -0.087 30-year bond 90-48/256 4.7433 -0.088 (Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis)