TREASURIES-US yields climb as inflation data dashes hopes for large rate cut

(Updates at 0920 ET)

By Davide Barbuscia

NEW YORK, Sept 11 (Reuters) - U.S. Treasury yields rose on Wednesday after the release of August data showing U.S. consumer prices rose marginally while underlying inflation remained sticky, curbing expectations for a large interest rate cut by the Federal Reserve next week.

Excluding the volatile food and energy components, the Consumer Price Index climbed 0.3% in August after rising 0.2% in July. In the 12 months through August, the so-called core CPI increased 3.2%. That followed a 3.2% gain in July.

Treasury yields, which move inversely to prices, surged after the release, while traders pared back bets on a 50 basis point cut by the U.S. central bank at its Sept. 17-18 rate setting meeting.

Benchmark 10-year yields were last at 3.663%, up from 3.644% on Tuesday. Two-year yields, more reflective of expected changes in monetary policy, were at 3.651%, up about 4 basis points from Tuesday.

Traders now see just a 15% chance of a bigger half-point rate cut next week, down from about 29% before the report. Total rate cuts for the year were seen at about 106 basis points after the report, down from 113 basis points earlier.

"Core (CPI) at 0.3% is what's shaken up the market," said Tony Farren, managing director in rates sales and trading at Mischler Financial Group.

"This dampens the chances of a 50 basis point cut in September; I think that's definitely off the table now, and it hurts the chances for any 50 bps cut for the rest of the year, although we still have a lot of data after," he said.

The rise in yields on Wednesday followed large bond gains overnight, with yields touching fresh lows in over a year.

Some analysts said that was partly a reaction to the U.S. presidential debate on Tuesday evening. Vice President Kamala Harris, the Democratic candidate, was widely seen as dominating the debate with Republican former President Donald Trump, prompting betting markets to give her better odds in the November presidential election.

"Yields drifted slightly lower during the overnight session with a theme of stability emerging in the wake of the Harris/Trump debate," BMO Capital Markets rates strategists wrote in a note. "From the perspective of the US rates market, nothing emerged from the debate that triggered reflationary jitters or concerns about Treasury supply indigestion."

Harris' late entry in the presidential race after President Joe Biden's withdrawal in July prompted a reversal of bond trades that were put in place on expectations of a second Trump presidency. Those expectations had led to higher U.S. Treasury yields on anticipation of higher inflation and wider budget deficits under Trump.

On the supply side, later on Wednesday the Treasury will sell $39 billion in 10-year notes, which will be followed by a $22 billion 30-year bond auction on Thursday. (Reporting by Davide Barbuscia; Editing by Andrew Heavens and Jonathan Oatis)