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U.S. housing starts fall, Philly Fed index declines

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U.S. yield curve reduces inversion

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U.S. rate futures price in one to two cuts this year

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U.S. $21 billion five-year TIPS auction shows strong

demand

(Adds comment, U.S. five-year TIPS auction results, graphics;

updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, June 20 (Reuters) - U.S. Treasury yields rose

across the board on Thursday as investors continued to rebalance

positions after last week's sharp decline on further evidence

the world's largest economy is finally slowing down.

Investors are also looking ahead to next week's auction of

about $183 billion in U.S. two-, five- and seven-year Treasury

notes. They tend to sell Treasuries ahead of auctions to push up

the yield before buying them back at a lower price, a practice

called concession.

U.S. yields briefly came off their highs after Thursday's

generally soft economic reports with the contraction in housing

starts, a decline in the Philadelphia Federal Reserve business

conditions index, and an increase in continuing jobless claims

to 1.828 million in the latest week, the highest since January.

The initial weekly jobless claims, however, rose to 238,000,

reversing about a third of the surge in the prior week, which

had pushed up claims to a 10-month high.

"There's no doubt that the Fed is eager to lower interest

rates," said Mark Heppenstall, president and chief investment

officer at Penn Mutual Asset Management in Horsham,

Pennsylvania, noting that the Fed believes monetary policy is

restrictive enough.

"But economic data has been somewhat of a mixed picture

so far this year. A lot of the diverging data points have left

the Fed and some investors confused with regard as to what is

exactly the next story," he added.

In afternoon trading, the benchmark U.S. 10-year yield rose

3.5 basis points (bps) to 4.251%.

The U.S. 30-year yield gained 3.7 bps to 4.390%.

The two-year yield was up 2.5 bps at 4.728%.

A strong auction of U.S. five-year Treasury

Inflation-Protected Securities (TIPS) added to overall bids in

Treasuries, pushing yields off their highs.

The auction stopped at a

high yield of 2.05%

, below expectations, suggesting that demand for inflation

protection was robust and investors did not seek a premium to

purchase the note.

The bid-to-cover ratio, a measure of demand, was 2.52,

down marginally from 2.58 at the previous auction, but in line

with the 2.51 average.

U.S. five-year TIPS yields have declined more than 20

basis points since hitting one-month peaks in late May.

Post-auction, the yield was slightly lower at 2.053%

.

In other parts of the bond market, the U.S. yield curve

became less inverted on Thursday. An inverted yield curve has

historically preceded past recessions. The curve between the

U.S. two- and 10-year yields was minus 47.9 bps,

compared with minus 49.3 bps late on Tuesday.

The curve is a "bear steepener," a scenario in which

long-term rates are rising more steeply than shorter-dated ones.

This often happens when the market thinks inflation could pick

up, likely delaying the start of the Fed's easing cycle.

These curves can change daily depending on market volume,

flow of funds and economic data.

Following Thursday's economic data, fed funds futures

slightly pared the chances of easing in September to 64%, from

about 67% late on Tuesday, according to LSEG's calculations. The

market is also pricing one to two rate cuts of 25 bps each this

year.

Minneapolis Fed President Neel Kashkari said on Thursday it

would take a year or two to get inflation back to 2% as wage

growth might still be a bit too high, fueling concerns interest

rates could remain elevated for some time.