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Yields rise as Fed rate-hike expectations increase

Bond traders at CME Group
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U.S. Treasurys yields rose on Friday, boosted by a third straight monthly gain in U.S. producer prices that brightened odds for a Federal Reserve interest rate hike as soon as September.

The Labor Department said its producer price index for final demand increased a more-than-forecast 0.2 percent last month after increasing 0.4 percent in June.

A key measure of underlying producer price pressures that excludes food, energy and trade services rose 0.2 percent last month after increasing 0.3 percent in June. The so-called core PPI was up 0.9 percent in the 12 months through July.

"The stronger core number actually encouraged a lot of people by raising the odds for a rate hike," said strategist Gennadiy Goldberg at TD Securities in New York.

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In another positive sign for third-quarter economic growth, the Fed reported that U.S. industrial output in July had gotten a boost from auto production and expanded at its best pace in eight months.

The spread between five-year and 30-year Treasurys tightened by 1.40 to 124 basis points, in a flattening of the yield curve reflecting enhanced investor conviction the Fed will soon hike rates for the first time in nearly a decade, Goldberg said.

Five-year Treasurys yields, which are one of the shorter maturities most affected by Fed rates policy shifts, were up 2 basis points at 1.597 percent. The long bond, in contrast, was flat and and yielding 2.844 percent.

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"You are getting a massive flattening, and it is entirely long bond driven," Goldberg said. "People realize if the Fed goes in September, it will be so slow and so small that people will still need duration."

Traders looking for fresh clues on Fed thinking were awaiting the release on Wednesday of the minutes of a July meeting of the Federal Open Market Committee, which sets interest rates policy.

Goldberg said he expects the minutes to show policymakers increasingly leaning towards raising interest rates.

"We expect them to be more hawkish," he said.

The benchmark 10-year Treasury yields was last up 1 basis point to 2.197 percent vs 2.187 at Thursday's close.