(Updates prices, adds details on Bank of Japan)
* Consumer price inflation rises more than expected
* Traders increase odds of December rate hike
* Fed, Bank of Japan meetings next week in focus
By Karen Brettell
NEW YORK, Sept 16 U.S. Treasuries yields rose on
Friday after data showed that U.S. consumer prices increased
more than expected in August, raising the odds that the Federal
Reserve will raise rates later this year.
The Labor Department said its Consumer Price Index rose 0.2
percent last month after being unchanged in July.
The core CPI, which strips out food and energy costs,
increased 2.3 percent in the 12 months through August, which is
above the Fed's 2 percent target.
Weak retail sales data on Thursday led traders to reduce
expectations that the U.S. central bank will raise rates this
The odds of a December hike rose back above 50 percent on
Friday, however, after the consumer inflation data.
"It certainly is another thing that could help them increase
their trend towards normalization," said Mary Ann Hurley, vice
president in fixed income trading at D.A. Davidson in Seattle.
Benchmark 10-year notes ended up 1/32 in price
to yield 1.70 percent, after trading at 1.67 percent before the
The Fed's statement from its two-day policy meeting next
Tuesday and Wednesday will be watched for any indications that a
rate hike is likely later this year, with investors pricing in a
low probability of a rate increase this month.
"They could change the narrative of their policy statement,
they could indicate that something is coming in December," said
Futures traders are now pricing in a 51.2-percent chance the
U.S. central bank will raise rates at its December meeting, up
from 47.5 percent on Thursday, according to the CME Group's
The odds of a September rate hike are unchanged at 12
Higher inflation also flattened the yield curve, pausing
this month's relentless steepening.
The yield curve between five-year note yields and 30-year
bond yields flattened to 123.70 basis points,
after reaching its steepest levels in two-and-a-half months on
Thursday at 130 basis points.
It has steepened from 102 basis points at the end of August
on concerns that the Bank of Japan will buy fewer long-term
bonds, and that the Fed may wait longer to raise rates.
The BOJ, which will conclude its September meeting next
Wednesday just before the Fed, is studying options to steepen
the yield curve to help prompt new lending by banks that have
been hurt by low long-term rates.
It will also consider making negative interest rates the
centerpiece of future monetary easing by shifting its prime
policy target to interest rates from base money.