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TREASURIES-U.S. yields edge upward as CPI data bolster December rate hike view

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* U.S. August consumer prices post biggest rise in seven months

* Futures imply traders see 50 pct chance of Dec rate hike

* U.S. yield curve moves to flattest level in over two weeks

(Updates with late trading) NEW YORK, Sept 14 (Reuters) - U.S. Treasury yields rose on Thursday, with the two-year yield hitting a seven-week peak as domestic consumer prices grew at their briskest pace in seven months, rekindling bets the Federal Reserve would raise interest rates for a third time in 2017. Longer-dated yields rose less than their short-dated counterparts, reflecting the view that the Fed's pace of raising short-term rates would be faster than the underlying inflation trend. "The number came in higher than expected. It gives the Fed a little more room to raise rates on the short end," said Justin Hoogendoorn, head of fixed income strategy and analytics at Piper Jaffray in Chicago. The consumer price index, the government's broadest inflation gauge, rose 0.4 percent in August, faster than the 0.3 percent increase forecast among analysts polled by Reuters. That lifted the CPI's year-over-year increase to 1.9 percent from 1.7 percent in July. But the so-called core CPI, which excludes volatile energy and food prices, rose 1.7 percent on a 12-month basis and remained stuck below the Fed's 2 percent goal for underlying inflation. "In the long term, we see slower business activities and inflation expectations coming down," Hoogendoorn said. Still, the CPI data revived expectations the U.S. central bank may consider hiking interest rates at its Dec. 12-13 meeting if subsequent data support the case that inflation is accelerating. Interest rates futures implied traders saw more than a 50 percent chance of rate increase in December, the highest since July, based on data from CME Group's FedWatch program. . The U.S. central bank raised short-term rates in March and June. Its current target range has been 1.00-1.25 percent. Fed policymakers will meet on Sept. 19-20 and are expected to leave rates unchanged and announce their plan to reduce the central bank's $4.2 trillion holdings of Treasuries and mortgage-backed securities. At 3:20 p.m. EDT (1820 GMT), the yield on two-year Treasury notes, which is sensitive to traders' view on Fed policy, was up 1 basis point at 1.368 percent. It touched 1.388 percent earlier on Thursday, which was its highest since July 26, Reuters data showed. The benchmark 10-year yield hit a three-week peak at 2.225 percent before retreating to 2.197 percent, up 0.2 basis point from late on Wednesday. The yield spread between five-year and 30-year Treasuries shrank to 99 basis points, the tightest in about 2-1/2 weeks, according to Tradeweb.

Thursday, Sept. 14 at 1521 EDT (1921 GMT): Price

US T BONDS DEC7 155-1/32 0-7/32 10YR TNotes DEC7 126-100/256 -0-16/25

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Price Current Net Yield % Change

(bps)

Three-month bills 1.0375 1.0546 0.011 Six-month bills 1.1475 1.1702 0.005 Two-year note 99-198/256 1.3676 0.013 Three-year note 99-158/256 1.506 0.021 Five-year note 99-58/256 1.7886 0.015 Seven-year note 99-20/256 2.0176 0.008 10-year note 100-120/256 2.197 0.002 30-year bond 99-112/256 2.7777 -0.017

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 24.75 1.00

spread

U.S. 3-year dollar swap 21.00 0.75

spread

U.S. 5-year dollar swap 8.00 0.75

spread

U.S. 10-year dollar swap -3.25 1.25

spread

U.S. 30-year dollar swap -33.25 1.00

spread

(Reporting by Richard Leong; Editing by Chizu Nomiyama and Dan Grebler)