TREASURIES-US yields sink after benign producer prices data

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US PPI data shows drop in services offsetting cost of goods

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Industrial production edges up in June

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Higher odds of Fed easing in October

(Adds analyst comment, details of the report, industrial production data, fed funds futures data, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, July 16 (Reuters) - U.S. Treasury yields declined on Wednesday, after hitting multi-week peaks overnight, following data showing tame producer prices last month, keeping the Federal Reserve on track to resume cutting interest rates later this year.

The benchmark 10-year yield hit a five-week peak overnight near 4.495% before sliding to 4.451% following the producer prices report.

The 30-year yield, that part of the Treasury curve seeing a selloff in recent weeks in line with other foreign bond markets, fell 3.8 basis points to 4.979% after touching a seven-week high of 5.03% earlier in the global session.

On the short end of the curve, U.S. two-year yields, which track interest rate expectations, were also down, dipping 3.2 bps to 3.927%. They rose to 3.959% earlier, the highest in four weeks.

Treasury yields fell after the headline U.S. producer prices index came in unchanged for June, compared with expectations for a 0.2% rise, while core or underlying prices were flat.

An increase in the cost of goods because of tariffs on imports was offset by weakness in services.

In the 12 months through June, the PPI increased 2.3% after advancing 2.7% in May. Data on Tuesday, meanwhile, showed consumer prices picking up in June, with solid gains in tariff-exposed goods like household furnishings and supplies, appliances, sporting goods and toys as well as windows, floor coverings and linens.

"There was no producer inflation in June," wrote Chris Low, chief economist at FHN Financial, in emailed comments after the data.

"The PPI is actually a tenth lower since peaking in February. Four months without producer price inflation would be unusual under any circumstances, but during the implementation of tariffs, it is remarkable."

Following the data, there has been no marked change in the rate cut odds for September, pinned at 56%, according to CME's FedWatch. That probability rises to 79% for the October meeting.

All told, the fed funds futures market, which is tied to monetary policy, has priced in about 46 bps in easing for 2025.

Wednesday's data showing a modest rise in factory production had little impact on the Treasuries market. Manufacturing output ticked up 0.1% last month after an upwardly revised 0.3% increase in May, the Fed said.

Economists polled by Reuters had forecast production unchanged after a 0.1% gain in May. (Reporting by Gertrude Chavez-Dreyfuss. Editing by Andrew Heavens and Mark Potter)