TREASURIES-Yields fall as traders wait on consumer inflation report

BY Reuters | ECONOMIC | 05/14/24 03:17 PM EDT

(Updated at 1500 EDT)

By Karen Brettell

May 14 (Reuters) - Treasury yields fell on Tuesday ahead of a highly anticipated consumer price inflation report on Wednesday that analysts say is likely to drive near-term Federal Reserve policy.

Higher-than-expected consumer prices in the first quarter of the year raised concerns that the Fed will be unable to cut interest rates this year unless there is a significant uptick in the unemployment rate.

Fed Chair Jerome Powell said on Tuesday he expects U.S. inflation to continue declining through 2024 as it did last year, though his confidence in that has fallen due to the first quarter data.

Higher-than-anticipated consumer prices on Wednesday will likely drive yields higher, but a softer report could also spark a large bond market rally, especially in light of market positioning.

"The markets are a little primed for a higher release, that seems to be what the hedges are all betting against," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

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%.

Weaker-than-expected jobs growth in April led investors to raise bets for two 25 basis point cuts this year, but the trajectory of inflation will be key to whether that occurs. Traders are now pricing in 45 basis points of cuts this year, down from around 46 basis points on Monday.

Benchmark 10-year yields jumped to an 11-day high earlier on Tuesday after data showed that producer prices rose more than expected in April.

Producer prices showed strong gains in the costs of services and goods. The producer price index (PPI) for final demand rose 0.5% last month after falling by a downwardly revised 0.1% in March.

LeBas said the producer price inflation report doesn't mean that Wednesday's consumer price index (CPI) will be higher than anticipated, noting that "historically surprises in the PPI are uncorrelated with surprises in the CPI."

It also follows a cool reading in March, which when added together leaves the index close to its recent trends. "It looks like we've got some month-to-month chop rather than anything meaningful," LeBas said.

Benchmark 10-year note yields were last down 4 basis points on the day at 4.445%, after reaching 4.534% in the aftermath of the data, the highest since May 3.

Two-year yields fell 4 basis points to 4.819%, after going as high as 4.899%, the highest since May 2.

The inversion in the yield curve between two-year and 10-year notes was little changed on the day at minus 38 basis points.

(Reporting by Karen Brettell; Editing by Franklin Paul and Jonathan Oatis)

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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