TREASURIES-US yields steady after slower-than-expected inflation rise

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By Tatiana Bautzer and Chuck Mikolajczak

NEW YORK, May 13 (Reuters) - U.S. 10-year Treasury yields were flat to marginally higher on Tuesday after inflation in the world's largest economy grew slower than expected last month, suggesting that the Federal Reserve is likely to take its time resuming its easing cycle.

The inflation data showed limited immediate impact from the Trump administration's sharp tariff rises announced early last month. Analysts, however, said prices are likely to pick up in coming CPI readings as they will show the period during which tariffs went into effect.

The consumer price index increased 0.2% last month after dipping 0.1% in March, which was the first decline since May 2020. Economists polled by Reuters had forecast the CPI would rise 0.3%. In the 12 months through April, the CPI climbed 2.3% after rising 2.4% in the 12 months through March.

Excluding the volatile food and energy components, the CPI rose 0.2% last month after gaining 0.1% in March. The so-called core CPI inflation increased 2.8% on a year-on-year basis in April after rising 2.8% in March.

Treasury yields slipped slightly after the CPI release. By late morning trading, the 10-year Treasury yield was up two basis points (bps) to 4.477%. The two-year yield, was slightly down at 3.994%.

Analysts noted that even as the headline number was 0.2%, below the 0.3% forecast, specific goods such as furniture and video and audio products showed high price increases.

"The report basically indicates that the Fed needs to be very cautious and that the stand that they have taken is probably the right course, for now," said Brian Jacobsen, chief economist at Annex Wealth Management.

Analysts expect the Federal Reserve will not cut interest rates until later in the year and potentially cut twice. The first 0.25 basis point cut is expected for the September meeting, according to CME's FedWatch tool.

After the U.S. and China agreed a 90-day reprieve on tariffs on Monday, showing the world's two largest economies' wish to avoid a trade war, markets reduced expectations of a U.S. recession or stagflation scenario.

"The CPI was softer than expected, which is good news, but markets are still cautious and looking for clarity on the longer term policy path," said Societe Generale's head of U.S. rates strategy Subadra Rajappa. She noted stocks got more of a positive momentum from the inflation report than the bond market.

Markets are beginning to look at the potential results of budget discussions in Congress. Republicans in the U.S. House of Representatives on Tuesday will kick off public debate on major pillars of President Donald Trump's tax cut and budget legislation. Congress' bipartisan Joint Tax Committee estimates the tax cuts would cost $3.72 trillion. (Reporting by Tatiana Bautzer; Additional reporting by Chuck Mikolajczak; Editing by Andrew Cawthorne, Nick Zieminski and Susan Fenton)