TREASURIES-U.S. yields fall as cooling inflation points to laxer Fed

BY Reuters | ECONOMIC | 09/14/21 03:17 PM EDT
    (Changes comment, updates prices)
    By Rodrigo Campos
    NEW YORK, Sept 14 (Reuters) - U.S. government bond yields
fell on Tuesday after data showed consumer prices increased at
their slowest pace in six months in August, suggesting that
inflation had probably peaked and removing urgency from the next
move by the Federal Reserve.
    The yield on the benchmark 10-year note fell
more than 6 basis points on the day to a low of 1.263%, the
lowest reading since Aug. 24.
    The core measure of U.S. consumer prices edged up 0.1% last
month, the smallest gain since February. The measure, which
excludes the volatile food and energy components, increased 4.0%
on a year-on-year basis after advancing 4.3% in July.
    The data could be volatile in the coming months as shortages
of basic materials and parts have created bottlenecks, and price
increases, across various supply chains.
    The August slowdown gives the Federal Reserve breathing room
as it prepares to reduce its massive bond holdings and decide
how soon to begin lifting rates from near zero.
    "When the CPI print came out earlier today, and the miss on
inflation to the downside, yields started to turn lower and it
just seems that the market is interpreting the miss as an
indication that the Federal Reserve will simply be more dovish
when it comes to monetary policy going forward," said Jim
Barnes, director of fixed income at Bryn Mawr Trust.
    The yield on 10-year Treasury notes was down 4.7
basis points to 1.277%. The 30-year Treasury bond yield
 was down 5.4 basis points to 1.850%.
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was down 0.6
basis points at 0.209%.
    The U.S. Treasury yield curve measuring the gap between
yields on 5- and 30-year Treasury notes was at
106.7 basis points, the flattest since August 2020.
    The flatter 5/30 spread points to traders losing interest in
the reflation story, in line with cooling inflation.
    The spread between 2- and 10-year Treasury yields
, was at 106.6 basis points.
    The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.512%, after closing at 2.554% on Monday.
    A pullback in U.S. stock indexes further pressured yields
lower mid-morning according to Tom di Galoma, managing director
at Seaport Global Holdings.
     "Equities seem to be struggling a bit and there's a flight
to quality behind it taking place," he said.

      September 14 Tuesday 3:10PM New York / 1910 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.04         0.0406    -0.005
 Six-month bills               0.05         0.0507    0.000
 Two-year note                 99-214/256   0.209     -0.006
 Three-year note               99-214/256   0.4301    -0.011
 Five-year note                99-218/256   0.7806    -0.024
 Seven-year note               100-96/256   1.0689    -0.036
 10-year note                  99-192/256   1.2769    -0.047
 20-year bond                  99-128/256   1.7799    -0.054
 30-year bond                  103-112/256  1.8498    -0.054

                               Last (bps)   Net
 U.S. 2-year dollar swap        10.00         0.25
 U.S. 3-year dollar swap        11.50         0.75
 U.S. 5-year dollar swap        10.00         0.50
 U.S. 10-year dollar swap        2.50         0.25
 U.S. 30-year dollar swap      -25.00         1.00

 (Reporting by Rodrigo Campos and Karen Brettell;
Editing by Marguerita Choy and Will Dunham)

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