TREASURIES-US bond slide as investors brace for hawkish Fed

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Inflation print as expected; market reaction muted

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US consumer sentiment improves in early December

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Fed poised to cut 25 bps next week

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US 10-year yields hit largest weekly rise since April

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US two-year yields post biggest weekly increase since October

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 5 (Reuters) - U.S. Treasuries weakened on Friday, lifting yields to multi-week highs, as investors priced in a Federal Reserve rate cut next week but braced for signals of a shallower easing cycle than expected.

The move reflected cautious sentiment, with traders reluctant to chase bonds higher amid uncertainty over the pace of the Fed's rate cuts.

Data on Friday also did not change expectations for the Fed's upcoming monetary easing. Inflation as measured by the Personal Consumption Expenditures (PCE) Price Index came in line with expectations, while U.S. consumer sentiment improved in December. In afternoon trading, the benchmark 10-year yield rose 3.1 basis points (bps) to 4.139%, after earlier hitting a two-week high. On the week, the yield was up 12.2 bps, the largest weekly rise since early April.

In the bond market, yields move inversely to prices.

U.S. 30-year bond yields climbed to a three-month high and were last up 3 bps at 4.794%. On a weekly basis, 30-year yields ascended 12.4 bps, the biggest weekly increase in eight months. On the shorter end of the curve, U.S. two-year yields, which reflect interest rate expectations, touched a two-week high and were last up 3.4 bps at 3.565%. They rose 7.3 bps on the week, the largest weekly advance since late October.

The Federal Open Market Committee, which sets monetary policy, is expected to end its two-day gathering next week by announcing it will lower the benchmark overnight rate by 25 basis points to a range of 3.50%-3.75%, with the central bank easing for a third straight meeting.

"The idea of a second consecutive hawkish cut took yields back toward the top of their four-month range," wrote Morgan Stanley (MS) in a research note led by Matthew Hornbach, global head of macro strategy.

"A vocal minority on the FOMC seem to have convinced many investors that a December cut must include hawkish forward guidance or risk mutiny." Data showed that the PCE price index increased 0.3% in September after gaining 0.3% in August. In the 12 months through September, the PCE Price Index advanced 2.8% after rising 2.7% in August. Excluding the volatile food and energy components, the PCE price index gained 0.2% in line with August's 0.2% gain. In the 12 months through September, the so-called core inflation increased 2.8% after rising 2.9% in August.

The Fed tracks the PCE price measure for its 2% inflation target.

INFLATION DEBATE Chris Zaccarelli, chief investment officer for Northlight Asset Management in Charlotte, North Carolina wrote in emailed comments that the Fed will be able to cut interest rates by 25 basis points, "although there will likely be some discussion - and potential dissent - about inflation remaining sticky and not approaching the 2.0% target any time soon."

Separately, the University of Michigan's Consumer Sentiment Index

increased to 53.3 in December from 51.0 in November, beating economists' expectations for a rise to 52, according to a Reuters poll. The improvement adds to a brighter outlook for the U.S. economy, supporting a growing view that the Fed may not need to cut interest rates as aggressively as previously thought.

In other corners of the bond market, the yield curve, which reflects monetary policy expectations, was little changed on Friday, with the spread between U.S. two-year and 10-year yields at 57.3 bps.

This just reflects a temporary reversal of the steepening trend seen in the last few days. Overall, the trend is for the curve to steepen in 2026 as the Fed continues to embark on its easing cycle even as inflation worries continue to percolate. "We are in a holding pattern, especially in terms of near-term rate expectations...and we have been quite rangebound since August," said Dhiraj Narula, U.S. rates strategist at HSBC in New York.

"That comes from a lot of uncertainty about the backdrop and especially recently with the Fed's blackout window, so there's been no commentary from FOMC members." (Reporting by Gertrude Chavez-Dreyfuss; Editing by Kirsten Donovan and Diane Craft)