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TREASURIES-Yields fall after benign core U.S. inflation data

Gertrude Chavez-Dreyfuss

NEW YORK, April 10 (Reuters) - U.S. Treasury yields slipped on Wednesday, weighed down by tepid underlying U.S. inflation in March, reinforcing expectations that the Federal Reserve would hold interest rates steady or possibly cut them by the end of the year. "There is a persistent trend of inflation underperformance that may soon become problematic for the Fed," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. Data showed that last month's U.S. core consumer prices, a key inflation gauge that the Fed monitors, rose 0.1 percent, lower than expectations of a 0.2 percent increase. Headline inflation, though, advanced 0.4 percent in March, boosted by rising gasoline prices and rents. That said, some analysts believed that while the near-term inflation outlook seemed benign after the data, higher oil prices in the first quarter that have extended through the second could nudge consumer prices higher this year. "The upside inflation risks for 2019 may be somewhat greater than the market appreciates," said Action Economics in its daily blog on Wednesday. Further pressuring yields that have pushed U.S. Treasury prices higher was the rally in the European bond market in the wake of downbeat comments on the economy by European Central Bank President Mario Draghi, said Tom di Galoma, managing director at Seaport Holdings in New York. The ECB's top official said risks to the euro zone economy remained tilted to the downside and that headline inflation is likely to decline over the coming months. His comments followed the ECB's dovish turn in March during its last monetary policy meeting when it restarted its stimulus program through a new round of cheap loans to banks. German government bond yields fell to a session low after Draghi's comments on Wednesday, while Italian bond yields extended their falls and were last down four basis points on the day at 2.54 percent. Investors now turn their attention to the minutes of the last Fed meeting, which offers a peek into the U.S. central bank's thinking as it navigates through what is probably the end of its tightening cycle. In midmorning trading, U.S. 10-year note yields fell to 2.475%, down from 2.499% late on Tuesday. U.S. 30-year bond yields also dipped to 2.895% from 2.909% on Tuesday. On the short end of the curve, U.S. 2-year yields slipped to 2.321%, compared with Tuesday's 2.344%. Later on Wednesday, the Treasury auctions $24 billion in U.S. 10-year notes, part of $78 billion in coupon offerings this week.

April 10 Wednesday 9:52AM New York / 1352 GMT

Price Current NetYield % Change

(bps)

Three-month bills 2.375 2.4225 -0.007Six-month bills 2.3925 2.4554 -0.010Two-year note 99-221/256 2.3212 -0.023Three-year note 99-240/256 2.2717 -0.030Five-year note 99-74/256 2.277 -0.027Seven-year note 99-60/256 2.3698 -0.02710-year note 101-80/256 2.4738 -0.02530-year bond 102-32/256 2.8931 -0.016

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 10.00 1.00

spread

U.S. 3-year dollar swap 6.50 0.00

spread

U.S. 5-year dollar swap 3.75 0.50

spread

U.S. 10-year dollar swap -1.75 0.25

spread

U.S. 30-year dollar swap -24.75 0.00

spread

(Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis)