Longer-dated yields fall, curve inversion deepens, before CPI

NEW YORK, July 11 (Reuters) – Longer-dated US Treasury yields fell on Tuesday and an inversion in a key part of the yield curve deepened as investors awaited inflation data on Wednesday for further clues on whether price pressures are abating.

Federal Reserve officials have indicated they expect to hike interest rates by at least another 50 basis points as they tackle persistent price pressures, but traders are only pricing in approximately 35 basis points of further tightening.

Investors are watching to see whether the 10-year Treasury yield moves definitively above the 4% level, which may occur if it appears that inflation pressures will continue.

“We’re trying to make the decision here – 4% take it or leave it … but right here people are not willing to risk too much in front of the CPI,” said Lou Brien, market strategist at DRW Trading in Chicago.

Tighter monetary policy would eventually lead longer-dated yields lower as investors worry about the impact on growth, Brien said, “but right in here the market doesn’t really know exactly when that time is going to be.”

Wednesday’s consumer price data is expected to show that headline and core inflation rose by 0.3% each in June, for an annual gain of 3.1% and 5.0%, respectively.

Benchmark 10-year yields fell two basis points to 3.986%, down from an eight-month high of 4.094% hit on Friday.

Interest rate sensitive two-year yields rose four basis points to 4.898%, after reaching 5.12% on Thursday, the highest since June 2007.

The inversion in the yield curve between two-year and 10-year notes deepened to minus 92 basis points, from minus 87 basis points on Monday.

New York Fed President John Williams said the central bank is not done raising its short-term rate target, in an interview with the Financial Times published on Tuesday.

The Treasury Department saw solid demand for a USD 40 billion sale of three-year notes on Tuesday, the first auction of USD 90 billion in coupon-bearing supply this week.

The notes sold at a high yield of 4.534%. Demand was 2.88 times the amount of notes on offer, the highest since May.

The Treasury will sell USD 32 billion in 10-year notes on Wednesday and USD 18 billion in 30-year bonds on Thursday.

July 11 Tuesday 3:05 PM New York / 1905 GMT

(Reporting by Karen Brettell, editing by Christina Fincher and Jonathan Oatis)