Treasurys
U.S. Treasury prices fell on Tuesday after consumer prices recorded their largest increase in more than a year, which may give the Federal Reserve more confidence in adopting a hawkish tone when it meets this week.
Benchmark 10-year notes fell 13/32 in price to yield 2.64 percent, up from 2.60 percent late on Monday.
Thirty-year bonds dropped 23/32 in price to yield 3.44 percent, up from 3.40 percent.
yields, which are highly sensitive to Fed policy, were flat at 0.47 percent, the highest since April 4. Three-year notes, meanwhile, dropped 4/32 in price to yield 0.99 percent, the highest since May 2011.
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The Labor Department said on Tuesday its consumer price index increased 0.4 percent last month, with food prices posting their biggest rise since August 2011.
Low inflation has posed a problem for the Fed's ability to raise interest rates as economic growth continues. A rise in inflation is likely to be seen as positive, even though the main inflation gauge watched by the Fed continues to run below the U.S. central bank's 2 percent target.
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"It was a much stronger print than the market was expecting and many are thinking that that may lead to a more hawkish tone tomorrow,'' said Michael Pond, head of global inflation-linked research at Barclays in New York.
"The Fed was patient with low inflation because they thought it was influenced by transient factors, and the recent data proves they are right. They are abating,'' Pond said.
Investors are focused on the Federal Reserve's monetary policy statement on Wednesday, when the U.S. central bank is expected to announce it will continue paring its bond purchase program and cut its growth projections.
The timetable for when each member of the Federal Open Market Committee expects policy to begin tightening, and how quickly, will be keenly scrutinized, as will any comments about interest rate hikes or slack in the economy from Fed Chair Janet Yellen, who is due to speak after the statement from the meeting are released.
Investors have been more wary of central banks becoming more hawkish, since Bank of England Governor Mark Carney surprised markets last Thursday by saying that Britain could become the first major economy to tighten monetary policy since the 2008 financial crisis.
The strong inflation data may also help demand when the Treasury sells $13 billion in new 30-year Treasury Inflation-Protected Securities on Thursday.
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The Fed bought $1.03 billion in bonds due from 2036 to 2044 on Tuesday as part of its ongoing purchases.
—By Reuters