US yields rise as inflation stays sticky

March 12 – US Treasury yields rose on Tuesday after consumer price inflation for February came in slightly above economists’ expectations, raising concerns that the Federal Reserve may not be able to cut interest rates as soon as investors expect if price pressures remain elevated.

The 10-year Treasury yield got an extra lift after weak demand at the Treasury’s auction of USD 39 billion of the benchmark note.

The consumer price index (CPI) rose 0.4% last month amid higher costs for gasoline and shelter, and so-called core prices also gained 0.4%. On an annual basis, headline prices rose 3.2% while core prices gained 3.8%.

“Sticky inflation seems to be very much intact at this point,” said Phillip Colmar, global strategist at MRB Partners in New York. “This is problematic for the bond market and the Fed’s view that inflation’s ultimately coming down to that 2% target.”

Fed funds futures traders reduced bets that the Fed will cut by June to 69%, from 72% on Monday, according to the CME’s FedWatch.

Benchmark 10-year notes yields were last up 5.8 basis points (bps) on the day at 4.156%. Two-year yields gained 6.9 bps to 4.600%.

The inversion in the yield curve between two-year and 10-year notes was little changed at minus 44.4 bps.

Traders are closely watching data for signs of when the US central bank will cut rates as economic growth remains strong. Reports showing higher-than-expected inflation and employment in January had raised concerns that inflation could be reheating, though the data was also likely affected by seasonal factors.

The Fed is expected to hold rates steady when it meets on March 19-20, though traders will focus on Fed policymakers’ updated economic and interest rate projections.

Traders will now shift their focus to the Thursday release of February’s producer price index and initial jobless claims for the week ending March 8.

“In terms of implications for the Fed, while today’s report alone may not be enough to stop the Fed from cutting rates midyear, it should raise real questions about the extent to which inflation will move back to target absent some further easing in the labor market,” Tiffany Wilding, managing director and economist at PIMCO, said in a Tuesday note.

Also on Tuesday, the US Treasury held a 10-year auction that was poorly received. The high yield of 4.166% was more than the market expected at the bid deadline, suggesting that investors demanded a premium to absorb the note.

The bid-to-cover ratio, a gauge of demand, was 2.51, slightly lower than the February level of 2.56 and slightly above the 2.48 average.

“It was a bit surprising because that concession going into the auction didn’t seem to lead to spectacular results,” said Michael Lorizio, senior fixed-income trader at Manulife Investment Management.

“But it wasn’t read as an aggressive liquidity event. So pricing came in line with a small tail, and it gave us direction but it wasn’t an abandonment.”

The Treasury Department will next sell USD 22 billion in 30-year bonds US30YT=RR on Wednesday.

(Reporting by Matt Tracy and Karen Brettell; Additional reporting by Karen Brettell and Herbert Lash; editing by Jonathan Oatis)