US yields rise as data points to hawkish Fed rate cut

NEW YORK – US Treasury yields gained on Thursday, but briefly pared their rise after data showed that jobless claims rose in the latest week, while producer price inflation came in above economists’ expectations but showed some underlying weakness.

The data overall confirms expectations that the Federal Reserve will cut rates by another 25 basis points when it concludes its two-day meeting next Wednesday.

But the US central bank is also expected to take a hawkish tone, and may signal that it is likely to pause rate cuts in January as it evaluates the outlook for inflation, which is still running above its 2% annual target, and the strength of the labor market.

“Given that the economy is probably going to be doing okay, I think the Fed could decide to keep rates on hold and just wait and assess to make sure that inflation expectations aren’t re-accelerating,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York.

“The last thing they want is next year to have to restart the rate hiking cycle because they’ve missed something,” Goldberg said.

Key to the Fed’s interest rate path next year will be how quickly the Trump administration introduces policies, including possible new tariffs that analysts say could increase inflation.

Data on Thursday showed that initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 242,000 for the week ended Dec. 7, which likely reflected volatility after the Thanksgiving holiday.

US producer prices rose more than expected in November amid a surge in the cost of food, but a moderation in the prices of services offered hope that the disinflationary trend remains in place.

TD revised its estimate for the Personal Consumption Expenditures Price Index, which is the Federal Reserve’s favorite inflation measure, downward on the data, Goldberg said. “A lot of the categories that flow into PCE were actually quite a bit weaker.”

Consumer price inflation data for November came in line with economists’ expectations on Wednesday, which boosted bets on another rate cut next week.

Benchmark 10-year note yields were last up 5.5 basis points to 4.326% and got as high as 4.332%, the highest since Nov. 25.

Two-year note yields, which are especially sensitive to interest rates, rose 2.9 basis points to 4.186%.

The yield curve between two-year and 10-year notes steepened by around two basis points to 14 basis points.

The US Treasury Department sold USD 22 billion in 30-year bonds later on Thursday to soft demand, the final sale of USD 119 billion in coupon-bearing supply this week.

The bonds sold at a high yield of 4.535%, around a basis point above where they had traded before the auction. Demand was 2.39 times the amount on offer, the lowest bid-to-cover ratio since September.

The US government saw solid demand for a USD 58 auction of three-year notes on Tuesday and good interest for a USD 39 billion sale of 10-year notes on Wednesday.

(Reporting by Karen Brettell; Editing by Paul Simao and Nick Zieminski)