) By Karen Brettell NEW YORK, Aug 16 (Reuters) - U.S. Treasury yields hit session highs on Wednesday after minutes from the Federal Reserve’s July meeting showed that Fed officials were divided over the need for more interest rate hikes, though “most” policymakers continued to prioritize the battle against inflation. “Some participants" cited the risks to the economy of pushing rates too far, however, and cautionary voices about the effects of continued monetary tightening appeared to play a more prominent role in the debate at last month's policy meeting. The U.S. central bank hiked rates by 25 basis points at the meeting and Fed Chair Jerome Powell said the economy still needed to slow and the labor market to weaken for inflation to "credibly" return to the U.S. central bank's 2% target. “They’re not quite sure how much of their policy has already affected the economy, and to what extent it still is going to,” said Lou Brien, market strategist at DRW Trading in Chicago. “They commented before that’s one of the reasons that they paused a couple of meetings ago... to try to assess the effect of the cumulative moves and the effect of how much more is to come - and it doesn’t seem to me that they have really answered that question yet.” Benchmark 10-year yields were last at 4.260%, after reaching a 10-month high of 4.274% on Tuesday. A break above the 4.338% level reached in October would bring yields to their highest since 2007. Interest rate sensitive two-year yields were at 4.980%. They are holding below yields of 5.120% reached on July 6, which were the highest since June 2007. The inversion in the yield curve between two-year and 10-year notes narrowed to minus 72 basis points. The next Fed focus will be the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyo., between Aug. 24 and Aug. 26. The Fed’s Sept. 19-20 meeting will also give new interest rate clues as Fed officials will update their interest rate projections for the coming quarters. Yields also rose earlier on Wednesday after two U.S. economic reports beat economists’ expectations. U.S. single-family homebuilding surged in July amid an acute shortage of previously owned houses. U.S. July industrial output, meanwhile, rose by 1.0%, beating expectations for a 0.3% gain. Data on Tuesday also showed that retail sales rose more than expected in July. Still, Ben Jeffery, an interest rate strategist at BMO Capital Markets, noted that Tuesday's selloff reached levels that were attractive to buyers and several factors might support lower yields. “We have gotten still good but no longer accelerating NFP (nonfarm payroll) prints, (and) a couple of CPI prints that show disinflation is continuing," Jeffery said. "I would say the consensus at this point is that the Fed will not hike in September even if they may hike in November/December, and I think all of these things are probably translating into increased comfort in buying dips.” Concerns about China’s economy are also adding to fears of a global slowdown. Missed payments on investment products by a leading Chinese trust firm and a fall in home prices have added to worries that China's deepening property sector crisis is stifling what little momentum the economy has left. In the longer-term, however, analysts also note that increasing Treasury supply due to a deteriorating U.S. deficit and the potential for lower demand from Japanese investors as the Bank of Japan shifts away from its ultra loose monetary policy could keep U.S. Treasury yields higher than they would otherwise be. August 16 Wednesday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 5.29 5.4511 0.000 Six-month bills 5.28 5.5152 -0.006 Two-year note 99-147/256 4.9801 0.026 Three-year note 99-40/256 4.6801 0.028 Five-year note 98-192/256 4.4082 0.030 Seven-year note 97-224/256 4.3572 0.034 10-year note 96-228/256 4.2603 0.039 20-year bond 91-84/256 4.5446 0.046 30-year bond 96-20/256 4.3606 0.042 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 0.00 0.00 spread U.S. 3-year dollar swap 0.00 0.00 spread U.S. 5-year dollar swap 0.00 0.00 spread U.S. 10-year dollar swap 0.00 0.00 spread U.S. 30-year dollar swap 0.00 0.00 spread (Reporting by Karen Brettell Editing by Tomasz Janowski and Chizu Nomiyama)
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