TREASURIES-Yields dip as investors await inflation report

BY Reuters | ECONOMIC | 05/13/24 03:17 PM EDT

(Updated at 1500 EDT/1900 GMT)

By Karen Brettell

May 13 (Reuters) - U.S. Treasury yields fell on Monday but held in a tight trading range as investors waited on highly anticipated Consumer Price Index (CPI) data for April due on Wednesday, which analysts say will be key for Federal Reserve policy for the rest of this year.

Consumer prices were higher than anticipated in the first quarter, which suggested that the U.S. central bank might make fewer rate cuts this year.

Weaker-than-expected jobs growth in April then led investors to reignite bets for two 25 basis point cuts this year, but that view is heavily dependent on inflation softening.

"It is difficult to overstate the importance of CPI for the Fed between now and the end of the year," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

"This is the one data print that will either confirm that the last mile on inflation is going to be very difficult, or it will mark the resumption of the trend that was in place towards easier inflation in the second half of last year," Lyngen added.

Wednesday's inflation report is likely to guide the Fed's policy outlook at its June 11-12 meeting, when officials will update their economic and interest rate projections.

"If the data comes in stronger than expected, it will be very difficult for the Fed to signal perhaps that 'we're going to do 50 basis points' worth of rate cuts' without an increase in the unemployment rate," Lyngen said.

Economists polled by Reuters expect the closely watched core CPI to rise by 0.3% in the month, down from 0.4% in March, for an annual gain of 3.6%, down from 3.8%.

Fed Vice Chair Philip Jefferson said on Monday that in an otherwise healthy economy the central bank should hold steady on monetary policy until it becomes clear that inflation is again moderating back to the 2% target.

The U.S. central bank will cut its key interest rate twice this year, starting in September, according to a stronger majority of economists polled by Reuters who broadly raised their inflation forecasts for a second consecutive month.

Benchmark 10-year note yields were last down 2 basis point at 4.623%.

Two-year yields fell 1 basis points to 4.857%.

The inversion in the yield curve between two-year and 10-year notes was little changed on the day at minus 37 basis points.

Other U.S. data this week will include producer prices for April on Tuesday and retail sales for April on Wednesday.

Americans last month braced for generally higher inflation pressures over the next few years and accelerating home price increases, according to a report released on Monday by the Federal Reserve Bank of New York.

(Reporting by Karen Brettell; Editing by Kevin Liffey and Will Dunham)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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