July 11, 2019 / 2:23 PM / 4 months ago

TREASURIES-Yields little changed by jump in U.S. consumer prices

    By Kate Duguid
    NEW YORK, July 11 (Reuters) - The Treasury market on
Thursday brushed off the biggest gain in U.S. underlying
consumer prices in 1-1/2 years, as it did little to change
expectations the Federal Reserve will cut interest rates later
this month.
    The Labor Department reported its consumer price index -
excluding the volatile food and energy components - rose 0.3% in
June. That is the largest increase since January 2018 and
followed four straight monthly gains of 0.1%. The so-called core
CPI was boosted by strong increases in the prices for apparel,
used cars and trucks, as well as household furnishings.
    Inflation has consistently undershot the Fed's 2% target and
has been cited as a risk by the central bank as it weighs
cutting interest rates in July for the first time since 2015. 
    "The Fed has left itself two paths to a rate cut. One is
inflation-shortfall-based and that is fading with this morning's
CPI data. The other is insurance-based," said Guy LeBas, chief
fixed income strategist at Janney Montgomery Scott.  
    On Wednesday, Fed Chair Jerome Powell delivered testimony to
Congress and the bank published minutes from its rate-setting
committee's June meeting, both of which cite the risks of
slowing global growth and the U.S. trade war with China. "It
seems policymakers are more focused on an insurance rate cut -
insurance against future growth shortfall."
    That explains the market's lack of a reaction to the
inflation data. The two-year yield, a proxy for
market expectations of changes in rate policy, rose initially,
but retraced most of those gains, last up less than a basis
points at 1.836%. The benchmark 10-year made less of
an initial move, but retained the gains, with its yield last up
1.6 basis points at 2.077%. 
    The chance of a 50-basis point cut fell on Thursday to 24.5%
from 29.2% on Wednesday, according to CME Group's FedWatch tool.
A 25-point cut has been fully priced in by the market, however,
and was not altered by the inflation report. 
    "You have to guess Jay Powell had this data point on his
desk yesterday," said LeBas.
    Later Thursday, the Treasury Department will auction $16
billion of 30-year notes. Demand is expected to be
strong: "The 30-year has been soft for the last couple days ... 
so I think we're setting up for pretty good demand at auction,"
said LeBas. 
    July 11 Thursday 10:10AM New York / 1410 GMT
 US T BONDS SEP/d              154-4/32     -17/32    
 10YR TNotes SE/d              127-60/256   -7/32     
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.1225       2.1635    -0.026
 Six-month bills               2.025        2.0799    0.008
 Two-year note                 99-152/256   1.836     0.010
 Three-year note               99-214/256   1.8064    0.008
 Five-year note                99-146/256   1.8409    0.012
 Seven-year note               99-140/256   1.9448    0.012
 10-year note                  102-168/256  2.0751    0.014
 30-year bond                  105-228/256  2.5903    0.019
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       23.60        0.55      
 30-year vs 5-year yield       74.90        0.10      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         3.75        -0.25    
 U.S. 3-year dollar swap         1.50         0.50    
 U.S. 5-year dollar swap        -1.00         0.50    
 U.S. 10-year dollar swap       -5.50         0.00    
 U.S. 30-year dollar swap      -32.75        -0.50    


 (Reporting by Kate Duguid)
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