US yields rise amid supply, before inflation data

NEW YORK – US Treasury yields rose on Tuesday as the Treasury sold USD 58 billion in three-year notes, the first of USD 119 billion in coupon-bearing sales this week, and as traders waited on key inflation data due later this week.

Tuesday’s three-year note auction saw solid demand at a high yield of 4.117%, only slightly above where it had traded before the sale. Demand was 2.58 times the amount of debt on offer.

It will be followed by an auction of USD 39 billion in 10-year notes on Wednesday and of USD 22 billion in 30-year bonds on Thursday.

Traders are waiting on consumer price inflation data on Wednesday and producer price inflation data on Thursday for any signs that inflation is picking up, which could derail the Federal Reserve’s expected interest rate cut next week.

“Those are the big numbers for the week,” said Tom di Galoma, head of fixed income trading at Curvature Securities. “I do think inflation is coming down… (but) inflation could certainly be a problem if it does push higher.”

Economists expect both headline and core consumer prices to have risen 0.3% in November, for an annual gain of 2.7% and 3.3%, respectively.

Producer prices are expected to show a 0.2% monthly increase in November, in both headline and core, for a 2.6% and 3.2% annual increase.

Markets are pricing in an 86% chance of a 25 basis point rate reduction next week, with a pause in January then seen as most likely.

Benchmark 10-year note yields were last up 2.5 basis points at 4.224%. Interest rate-sensitive two-year note yields rose 2.4 basis points to 4.151%.

The yield curve between two-year and 10-year notes was little changed on the day at 7 basis points.

Traders added to bets of a December rate cut after jobs data for November showed that the unemployment rate rose to 4.2%, from 4.1%, despite strong jobs gains during the month.

Data on Tuesday showed that US unit labor costs grew far less than initially thought in the third quarter, pointing to a still favorable inflation outlook, even though price increases have not moderated much in recent months.

Fed officials are in a blackout period before the Dec. 17-18 meeting.

(Reporting By Karen Brettell; Editing by Kevin Liffey and Chizu Nomiyama)