US Treasury yields rise ahead of inflation data

US Treasury yields rose on Monday as traders waited on key inflation data due this week to see whether stubbornly high price pressures could derail expectations for a Federal Reserve interest rate cut next week.

The Fed is widely expected to cut rates by 25 basis points at the conclusion of its Dec. 17-18 meeting, with a pause then seen as likely in January.

But inflation is key to whether the Fed will continue to cut rates.

Fed officials including Chair Jerome Powell have said that recent upticks in its preferred Personal Consumption Expenditures data reflect a bumpy path to its 2% annual target, but don’t change the overall trend.

“If we see a convincing uptick that the Fed isn’t able to continue using that bumpy excuse on, then that will call into question whether or not the Fed can deliver a rate cut next week,” said Vail Hartman, US rates strategist at BMO Capital Markets in New York.

Hartman said a solid to high 0.4% gain in core consumer prices could raise doubts over a cut next week, but rate expectations will also depend on producer prices.

Economists expect consumer prices released on Wednesday will show that both headline and core prices rose by 0.3% in November, for an annual gain of 2.7% and 3.3%, respectively.

Producer prices released on Thursday 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.

The next PCE release is due on Dec. 20.

Benchmark 10-year yields were last up 4.2 basis points at 4.195%. Interest rate-sensitive two-year yields rose 2.6 basis points to 4.124%.

The yield curve between two-year and 10-year notes steepened two basis points to 7 basis points.

Traders added to bets of a December rate cut after jobs data for November released on Friday showed some warning signs that the labor market was weakening. The unemployment rate rose to 4.2% from 4.1% despite strong jobs gains during the month.

Some underlying details in the report, including a weaker household survey, also pointed to declining labor market strength.

“The aggregate data is conforming with the whole slowdown theme,” said Hartman.

Fed officials are now in a blackout period before next week’s meeting.

Traders are also watching geopolitical events after rebels seized the Syrian capital of Damascus.

Risk appetite was boosted on news that China will adopt an “appropriately loose” monetary policy next year, the first easing of its stance in some 14 years, alongside a more proactive fiscal policy to spur economic growth.

The US Treasury Department will sell USD 119 billion in new coupon-bearing supply this week. This will include USD 58 billion in three-year notes on Tuesday, USD 39 billion in 10-year notes on Wednesday and USD 22 billion in 30-year bonds on Thursday.

(Reporting By Karen Brettell; editing by Jonathan Oatis)