TREASURIES-US bonds slide as producer prices surge, reinforce Fed caution

* Producer Price Index rises 0.7%, exceeding expectations

* Fed likely to delay rate cuts amid inflation pressures

* Yield curve flattens, reflecting Fed's cautious stance (Adds new comment, byline, details of the PPI data, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, March 18 (Reuters) - U.S. Treasuries fell on Wednesday after stronger-than-expected producer price data underscored persistent inflation pressures, boosting expectations that the Federal Reserve will delay interest-rate cuts.

U.S. yields, which move inversely to prices, rose across the curve, with the benchmark U.S. 10-year yields up 2.4 basis points (bps) at 4.222%, rising after declining for two consecutive days. The two-year yield, which reflects interest-rate expectations, climbed 5.3 bps to 3.724% , advancing after three days of declines.

The U.S. Producer Price Index (PPI) for final demand surged 0.7% last month, lifted by services, after an unrevised 0.5% rise in January, data showed. Economists polled by Reuters had forecast the PPI rising 0.3%. In the 12 months through February, the PPI increased 3.4% after advancing 2.9% in January.

Some components of the PPI and Consumer Price Index go into the calculation of the Personal Consumption Expenditures price indexes, the inflation measures tracked by the Fed for its 2% inflation target.

"The large upside surprise to the PPI in February confirms that stronger inflationary pressures were already making their way through supply chains even prior to the surge in oil prices," said Thomas Ryan, North America economist at Capital Economics, in emailed comments.

"The upshot is: there is nothing in the price data that suggests the Fed would be in a position cut again soon even if oil prices suddenly dropped back."

Post-PPI data, U.S. rate futures pared back, easing bets for 2026, now showing just 21 bps of rate cuts this year, from 26 bps late on Tuesday, according to LSEG data.

The U.S. central bank on Wednesday, through its policy-setting Federal Open Market Committee, is widely anticipated to keep its benchmark overnight interest rate in the 3.50% to 3.75% range at the end of the two-day meeting. But bond investors would be keen to hear how the Fed thinks the current war with Iran would impact interest rates and the broader economy.

Also following the data, the yield curve flattened for a third straight session, with the spread between two-year and 10-year yields narrowing to 48.8 bps US2US10=TWEB from 52 bps late on Tuesday. Wednesday's curve was the flattest since late November.

The curve was last at 50.8 bps, showing a bear flattening pattern, with short-term interest rates rising faster than long-dated ones. This situation likely reflects expectations that the Fed could continue the pause of its rate-cutting cycle as it looks to tamp down rising inflation. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Pooja Desai)