TREASURIES-US yields close higher to kick off holiday week

By Matt Tracy

Dec 22 (Reuters) - Benchmark U.S. 10-year Treasury yields ended higher on Monday as the market entered the holiday-shortened week.

The yield on 10-year Treasury notes US10YT=RR was last up 1.8 basis points at 4.168%.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was last up 2.5 bps at 3.510%.

The yield on the 30-year Treasury bond US30YT=RR was up 2 bps at 4.8415%.

Yields were largely unmoved following the release on Monday of the Chicago Federal Reserve's national activity index.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, which is seen as an indicator of economic expectations, was at 65.9 bps.

The U.S. dollar 5-year forward inflation-linked swap USIL5YF5Y=R, seen by some as a better gauge of inflation expectations due to possible distortions caused by the U.S. central bank's quantitative easing, was last at 2.46%.

The Treasury Department will hold several auctions this week. It auctioned $69 billion in two-year notes on Monday afternoon, which will be followed by $70 billion in 5-year notes US5YT=RR on Tuesday and $44 billion in seven-year notes US7YT=RR on Wednesday.

Monday's two-year note auction met with tepid investor demand. It had a bid-to-cover ratio of 2.54x, which was below 2.68x in the last November auction and a 2.60x average for the last ten such auctions. It had a high yield of 3.499%.

"The ongoing compression in Treasury volatility bodes well for bidding conviction, as does the lack of near-term event risk on the economic data calendar," BMO rates strategists wrote in a Monday note.

Odds of a Fed rate cut at the policy meeting in late January are priced as low as just under 20%, according to CME Group data, despite recent U.S. data showing the consumer price index rose at a 2.7% annualized rate in November.

"If the next payrolls report (or) the next CPI print are very soft, that will be meaningful and I expect the market would adjust the odds of a January cut accordingly," said Eric Winograd, director of developed market economic research at AllianceBernstein.

"I don’t think there is anything coming out this week that can or should change the market’s view - we’ll have to wait until January to get first-tier data that might move the needle or speeches from key members of the FOMC," Winograd added.

Bond markets will close early at 2 p.m. EST on Wednesday (1900 GMT) and remain shut through Christmas Day on Thursday.