US yields little changed with inflation data, Fed on tap

NEW YORK, June 12 (Reuters) – Longer-dated US Treasury yields inched higher on Monday as investors awaited upcoming inflation data and a policy announcement from the Federal Reserve in the coming days.

The consumer price index (CPI) for May is expected on Tuesday to show a slowing rise in inflation on a year-over-year basis to 4.1% from the April reading of 4.9%, according to economists polled by Reuters, with a monthly increase of 0.2%, down from a 0.4% rise the prior month.

The CPI data along with the producer price index (PPI), due on Wednesday, could influence expectations for the Fed’s policy announcement Wednesday afternoon.

The Fed is currently expected to deliver a “hawkish pause” at its policy announcement, taking a break from its string of rate hikes while cautioning that more hikes could be necessary should inflation remain stubbornly high. The central bank is also due to release its summary of economic projections (SEP) for the first time since its March meeting.

“Right now, the market is probably going to move sideways until you get the inflationary data tomorrow and then all eyes will be on the Fed, because you also get the summary of economic projections too,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

“The Fed has been a little more aggressive than what the market is pricing in, and now the market has kind of gone back to where the Fed is, so that summary of economic projections becomes more compelling to see what the forecast is for the end of this year and for the end of next year.”

The yield on the benchmark 10-year Treasury notes was up 0.6 basis points at 3.751%.

An auction of USD 32 billion in 10-year notes was soft, according to analysts, with a high yield of 3.791% and demand for the debt at 2.36 times the notes on sale.

Traders are pricing in a 76.9% chance the Fed will hold rates steady at its next policy announcement, up from 70.1% on Friday, according to CME’s FedWatch Tool.

Barnes also said last week’s rate hike from the Bank of Canada after a four-month pause raises the question of whether the Fed will still be raising rates in the back half of this year and the start of next year.

The yield on the 30-year Treasury bond was up 0.8 basis points at 3.895%.

Treasury will issue a flurry of supply this week, including USD 18 billion in 30-year notes on Tuesday along with a slew of shorter-term bills throughout the week.

The yield on the 3-year Treasury note was down 1.7 basis points at 4.230%. A USD 40-billion auction of the notes was in-line with the market with a high yield of 4.202% which was just slightly over the bidding deadline yield, while demand was an above average 2.7 times the notes on sale.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 83.6 basis points after inverting to as much as a negative 87.55 earlier, its deepest inversion in three months.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 1.9 basis points at 4.586%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.14%, after closing at 2.169% on Friday,

The 10-year TIPS breakeven rate was last at 2.193%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Susan Fenton and Nick Zieminski)