TREASURIES-Yields little changed after brief wobble on neutral PPI picture

BY Reuters | ECONOMIC | 10/11/24 12:24 PM EDT

(Updates as of 1040 ET)

By Alden Bentley

NEW YORK, Oct 11 (Reuters) - U.S. Treasury yields were mainly steady on Friday after bobbling on news that producer prices were flat in September, avoiding an inflation curve ball for the Federal Reserve before it must decide how much more to ease at its next meeting.

The unchanged reading in the producer price index for final demand last month followed an unrevised 0.2% gain in August, the Labor Department said on Friday. Economists polled by Reuters had forecast the PPI edging up 0.1%. In the 12 months through September, the PPI increased 1.8%, after climbing 1.9% in August, more than the expected 1.6% rise.

The data followed news on Thursday that consumer prices rose slightly more than expected in September, lifted by higher food costs. The two reports supported views the Federal Reserve would cut interest rates again after September's aggressive 50-basis point reduction, but probably by less.

"It turned out to be just fractionally hotter than we expected. It boosted the year-over-year rate a little bit," said Kim Rupert, managing director, fixed income at Action Economics in San Francisco.

"So, in combination with everything else we've seen between the GDP upward revision to income, obviously the employment report, I think the Fed still is going to cut rates but just only needs to cut by 25 (bp) over the next two meetings,"

The yield on benchmark U.S. 10-year notes was off 0.2 basis points from late Thursday at 4.092%, just below where it stood before the PPI was released.

The 30-year bond yield was up 1.1 basis points to 4.3962% and the 2-year note yield, which typically moves in step with interest rate expectations, was off 3.5 bp at 3.964%.

Later in the morning, the release of the University of Michigan preliminary October consumer sentiment index showing a fall to 68.9 from 70.1 in September, barely moved the needle for the bond market.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 12.6 basis points, steeper than late Thursday's +10.2 bp.

Based on the fed funds futures term structure, traders see an 88% chance of a 25 bps ease in the policy rate at the central bank's November meeting, while the odds for a quarter-point cut were 85% late on Thursday. The rate has been in a 4.75%-5.0% target range since the Fed cut last month.

The futures market also showed about 49 bps of easing this year, down from more than 50 bps early this week. It priced in almost 100 bps of Fed cuts in 2025, which was a sharp drop from the roughly 200-250 bps of reductions estimated prior to last Friday's blockbuster U.S. nonfarm payrolls report, which reset Fed easing expectations.

The Treasuries market is closed on Monday for Columbus Day. (Reporting by Alden Bentley; Editing by Andrea Ricci and Chris Reese)

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.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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