TREASURIES-Yields fall as consumer prices largely meet expectations

BY Reuters | ECONOMIC | 05/15/24 09:17 AM EDT

(Updated at 0900 EDT)

By Karen Brettell

May 15 (Reuters) - U.S. Treasury yields fell to more than five-week lows on Wednesday after data showed U.S. consumer price inflation was largely as expected in April with headline prices rising slightly less than expected, boosting expectations that the Federal Reserve will cut interest rates two times this year.

Higher than expected consumer price inflation in the first quarter raised concerns that the U.S. central bank will not be able to cut interest rates as many times as previously expected this year.

Fed funds futures traders are now pricing in 51 basis points of cuts this year, up from 45 basis points on Tuesday, with the first 25 basis point cut likely in September.

"We haven't made significant progress this year in our battle against inflation... and this is a step in the right direction to get the Fed more comfortable," said Art Hogan, chief market strategist at B. Riley Wealth in New York.

The consumer price index rose 0.3% last month after advancing 0.4% in March and February. In the 12 months through April, the CPI increased 3.4% after climbing 3.5% in March. Economists polled by Reuters had forecast the CPI gaining 0.4% on the month and advancing 3.4% year-on-year.

The closely watched core CPI rose 0.3% in April, as expected, after advancing 0.4% in March. In the 12 months through April, the core CPI increased 3.6%. That was the smallest year-on-year gain since April 2021 and followed a 3.8% increase in March.

The Fed is likely to still need further confirmation that inflation is heading back closer to its 2% annual target before cutting rates.

"What it doesn't do is put the Fed on a trajectory to begin cutting immediately. They're going to need a couple more reports to get some confidence," said Jason Pride, chief of investment strategy and research at Glenmede in Philadelphia.

Other data on Wednesday also showed that U.S. retail sales were

unexpectedly flat

in April as higher gasoline prices pulled spending away from other goods.

Benchmark 10-year yields were last down 8 basis points on the day at 4.367% and got as low as 4.340%, the lowest since April 5.

Two-year yields fell 8 basis points to 4.739% and reached 4.711%, also the lowest since April 5.

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

(Reporting By Karen Brettell; Additional reporting by Johann M Cherian and Ankika Biswas; Editing by Andrew Heavens and Chizu Nomiyama)

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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