TREASURIES-U.S. yields edge up as market awaits Fed meeting next week

(Adds Bank of Canada meeting in paragraph 4, comment in paragraphs 5, 8, Treasury bill issuance in paragraph 13) By Herbert Lash NEW YORK, June 6 (Reuters) - Treasury yields edged higher on Tuesday as the market awaits the release next week of consumer price data followed by a Federal Reserve meeting in which futures traders expect policymakers to pause their aggressive hiking of interest rates. The two-year Treasury yield, which typically moves in step with interest rate expectations, rose 3.3 basis points to 4.516%, while the yield on 10-year notes unchanged to 3.693%. The Reserve Bank of Australia earlier on Tuesday raised rates by a quarter-point to an 11-year high of 4.1%. The Australian central bank warned that further tightening may be required to ensure that inflation returns to target. The Bank of Canada meets on Wednesday, and if it pauses that increases the likelihood the Fed does too a week later, said Thierry Wizman, global FX & interest rates strategist at Macquarie in New York. "You might want to infer a little bit about what the Fed might do, but not too much, especially if they hike," he said. The RBA move was a bit surprising but with U.S. debt ceiling worries out of the way, people in the U.S. are focused more on next week than this week. The Labor Department will release the Consumer Price Index (CPI) for May on June 13, a day before the Fed is seen keeping its target rate unchanged at 5%-5.25% - the first time since March 2022 that the U.S. central bank does not raise rates. "The Fed could look at CPI and use it as justification to hike," Wizman said. "But I wish they wouldn't, because if they look through that and look at what's in the pipeline, they'll see a lot more disinflation than what's reflected in the CPI." Fed funds futures show a 79.4% probability that the Fed keeps rates steady, according to the CME Group's FedWatch Tool. Markets also are waiting for the Treasury Department to issue around $1 trillion in short-term bills to replenish cash reserves depleted during the debt ceiling impasse in Congress. "It's going to take cash out of the market, that's the idea. Treasury wants to boost its cash balance," said Mike Schumacher, head of macro strategy at Wells Fargo Securities in New York. "Is this liquidity drain - if you want to call it that - is it going to impact equities and other risky assets in a big way? Remains to be seen, because the flow will be negative, but the level of liquidity is still very high," he said. The Treasury announced it will sell $46 billion of 17-week bills on Wednesday, and $60 billion of four-week bills along with $50 billion in eight-week bills on Thursday. The Treasury sold $123 billion in three- and six-month bills on Monday. The yield on the 30-year Treasury bond slipped 2.3 basis points to 3.869%. The spread on the inversion of the Treasury yield curve, known as a recession harbinger when short-dated debt yields more than longer-dated debt, was at -82.7 basis points. The 10-year TIPS breakeven rate was last at 2.209%, indicating the market sees inflation averaging about 2.2% a year for the next decade. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.18%. 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 2.509%. June 6 Tuesday 2:24 p.m. New York / 1824 GMT Price Current Yield % Net Change (bps) Three-month bills 5.18 5.3224 0.000 Six-month bills 5.205 5.4348 -0.029 Two-year note 99-128/256 4.5162 0.033 Three-year note 98-138/256 4.1577 0.035 Five-year note 99 3.8474 0.019 Seven-year note 99-212/256 3.7781 0.006 10-year note 97-96/256 3.6928 0.000 20-year bond 97-240/256 4.0263 -0.015 30-year bond 95-180/256 3.8685 -0.023 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 16.50 0.00 spread U.S. 3-year dollar swap 10.75 -0.75 spread TU.S. 5-year dollar swap 5.75 -0.50 spread U.S. 10-year dollar swap 2.00 -1.50 spread U.S. 30-year dollar swap -41.25 -1.25 spread (Reporting by Herbert Lash; Editing by Andrea Ricci and Nick Zieminski)