(Recasts with price gains, adds quotes)
* Stock weakness adds bid for bonds
* U.S. budget seen increasing debt issuance
* CPI data in focus next week for inflation clues
By Karen Brettell
NEW YORK, Feb 9 (Reuters) - U.S. Treasury prices gained on Friday after renewed weakness in equity markets increased demand for the low-risk debt.
Bond yields have jumped in the past two weeks as rising inflation and other economic data has led investors to adjust for the prospect of faster economic growth and the possibility the Federal Reserve will raise interest rates faster than previously expected.
Rising bond yields, however, have spooked equity investors, who worry that higher rates may dent growth. Volatility in equities has in turn added back a bid to hold low-risk U.S. government debt.
"As we've seen the volatility in equities creep back inwe've seen a bid hit the Treasury market," said Mike Lorizio, a senior fixed income trader at Manulife Asset Management in Boston.
Benchmark 10-year notes were last up 9/32 in price to yield 2.819 percent, down from 2.849 percent on Thursday.
For most of the week they have traded near the high end of this week's range, which is between a four-year high of 2.885 percent and a low of 2.648 percent both reached on Monday.
A budget deal reached on Friday to increase spending increased concerns about rising debt issuance, which is expected to weigh on bond prices going forward.
The budget bill raises military and domestic spending by almost $300 billion over the next two years. "This is a larger effect on the deficit over the next two years than the tax bill by a significant margin," said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York.
Issuance is also expected to jump as the Treasury rebuilds its cash position after the country's debt ceiling was lifted until March 2019.
The Treasury has already begun to increase the size of its public auctions to make up for declining purchases by the Federal Reserve, which analysts say may have added to the softness of $66 billion in new sales of three-, 10- and 30-year debt this week. The U.S. central bank's purchases have not been included in the bond sales, which previously enabled the Treasury to lower public auctions sizes.
Next week's consumer price and retail sales data will be scrutinized for further inflation indications.
"CPI next week will be pretty telling," said Lorizio. "While inflation expectations have certainly creeped up a bit, measured inflation hasn't shown many signs of accelerating in a significant way."
(Editing by Lisa Shumaker)
Change vsCurrent
Nykyield Three-month bills 1.535 (+0.01) 1.562 Six-month bills 1.695(unch) 1.733 Two-year note 99-30/32 (+06/32) 2.037 Five-year note 99-14/32 (+11/32) 2.496 10-year note 99-13/32 (+09/32) 2.819 30-year bond 97-12/32 (+4-26/32) 3.137
DOLLAR SWAP SPREADS
LASTChange U.S. 2-year dollar swap spread27.75 (+4.00) U.S. 3-year dollar swap spread20.00 (+2.75) U.S. 5-year dollar swap spread10.25 (+1.75) U.S. 10-year dollar swap spread0.50 (-0.75) U.S. 30-year dollar swap spread-19.75 (-1.75)))Keywords: USA BONDS/
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