US yields rise as inflation optimism wanes ahead of Fed

NEW YORK, June 13 (Reuters) – US Treasury yields rebounded from a brief decline on Tuesday after economic data showed a slowing rise in inflation, a day ahead of the Federal Reserve’s next interest rate decision.

The consumer price index (CPI) showed an annual increase in prices of 4% in May, slowing from a 4.9% reading in April. On a monthly basis, CPI increased 0.1%, just shy of the 0.2% increase expected by economists polled by Reuters.

Traders firmed up expectations the Fed will keep rates steady at the conclusion of its policy meeting on Wednesday and keep the benchmark rate at 5.0%-5.25%.

Expectations for the Fed to hold rates are now at 95.3%, up from 79.1% a day ago, according to CME’s FedWatch Tool, but expectations for a 25-basis-point hike at the July meeting are at 63.1%.

“Not only should the Fed skip tomorrow’s hike, they should just skip the entire meeting. The data ever so slightly tilts things towards this not just being a skip, but a full-blown hold,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

But the early fall in yields proved to be temporary ahead of the Fed’s policy announcement and another reading on inflation, the producer price index for May.

“People are sort of hedging their bets. They are not really sure what is likely to happen,” said Sam Stovall chief investment strategist at CFRA in New York.

“Maybe the Fed has been backed into skipping this month but there is a possibility they won’t be skipping next month, so maybe it is like pulling petals where you skip, you hike, you skip, you hike.”

In addition, Bank of England Governor Andrew Bailey said official data published earlier in the day showed the labor market was “very tight” and food inflation was easing very slowly, indicating the central bank will remain on a hiking path.

The yield on 10-year Treasury notes was up 7.4 basis points at 3.839%.

Policy announcements are also expected from the European Central Bank (ECB) and Bank of Japan later in the week.

An USD 18-billion auction of 30-year bonds by the Treasury was strong, with a high yield of 3.908% and demand for the debt at 2.52 times the bonds on sale, the highest since January 2020, according to Refinitiv data.

The yield on the 30-year Treasury bond was up 3.5 basis points to 3.941 %.

A closely watched part of the US Treasury yield curve measuring the gap between two- and 10-year notes, seen as an indicator of economic expectations, was at a negative 86.3 basis points after inverting by as much as a negative 94.49 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 10.8 basis points at 4.700% after rising to 4.707%, its highest since March 10.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at
2.162%, after closing at 2.145% on Monday.

The 10-year TIPS breakeven rate was last at 2.212%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama, Andrea Ricci and Richard Chang)