TREASURIES-US yields dip as in-line inflation data backs December rate cut

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US CPI comes in line with forecasts, weighs on yields

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US rate futures raise odds of Fed easing in December

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US yield curve steepens as cuts priced in

(Adds analyst comment, details on CPI, bullets, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Nov 13 (Reuters) - U.S. Treasury yields fell on Wednesday after data showed no major surprises on inflation in the world's largest economy, coming in largely in line with forecasts, suggesting the Federal Reserve is on track to cut interest rates as expected next month.

The benchmark 10-year yield slid 3.3 basis points to 4.398% , while the two-year yield, which reflects interest rate expectations, was down 7.1 bps at 4.273%.

Data showed that the consumer price index rose 0.2% for a fourth straight month in October. In the 12 months through October, the CPI advanced 2.6% after climbing 2.4% in September. Economists polled by Reuters had forecast the CPI gaining 0.2% and increasing 2.6% year-on-year.

Excluding the volatile food and energy components, the CPI increased 0.3% in October, rising by the same margin for the third consecutive month. In the year through October, the so-called core CPI gained 3.3%, sporting the same rise in September.

"It's really a sigh of relief, came in a few basis points, I think, less than consensus estimates, and, looking at the report, there's really nothing here that would tell you inflation is... reaccelerating or picking back up," said Matt Bush, U.S. economist at Guggenheim Investments in New York.

"And so the market is reflecting that sigh of relief that inflation, if nothing else, is holding steady, if not ticking down a little bit month over month."

Federal funds futures, which measure the cost of unsecured overnight loans between banks, have priced in an 85% chance of a 25-bp rate cut at next month's policy meeting after the CPI data, and a 15% probability that the Fed will pause easing, according to LSEG calculations. That probability was at 80% late on Tuesday.

For 2025, futures have implied 54 bps in rate reductions, compared with 45 bps in cuts in the previous session.

U.S. 30-year yields slipped 1.7 bps to 4.559%.

Treasury yields were on the upswing following the U.S. presidential election with the victory of Donald Trump seen as ushering renewed inflation with lower taxes and higher tariffs.

The U.S. yield curve steepened after the inflation data, with the gap between two-year and 10-year yields at 12.2 bps , compared with 8.4 bps late Tuesday. The gap narrowed as much as 3.4 bps immediately after the release of the data. The gap hit 19.5 bps on Nov. 6, a day after the election.

The steepening of the curve suggested that bond investors are pricing in continued easing for the Fed, at least for next month and until 2025, with the short end of the yield curve under control with the cuts.

Post-CPI data, the U.S. break-even inflation rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) slipped to 2.410%, from 2.433% on Tuesday. It had surged more than 50 bps since Sept. 10, when it was at a four-year low.

The five-year breakeven suggested that U.S. inflation will average roughly 2.41% over the next five years. (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Chuck Mikolajczak; Editing by Andrew Cawthorne)