September 13, 2018 / 7:11 PM / 3 months ago

TREASURIES-Yields steady as market digests CPI data, after auction

 (Updates headline, lead, rates; adds auction news)
    By Kate Duguid
    NEW YORK, Sept 13 (Reuters) - U.S. Treasury yields retraced
losses on Thursday afternoon as the market digested an earlier
U.S. government report showing that consumer prices rose less
than expected in August, and after solid demand for 30-year
bonds at auction. 
    On Thursday morning, the Labor Department said its consumer
price index rose 0.2 percent last month after a similar gain in
July, as increases in gasoline and rent were offset by declines
in healthcare and apparel costs. Core CPI, which excludes food
and energy prices, edged up 0.1 percent after having increased
0.2 percent for three straight months.
    Yields initially fell to session lows across maturities as
the data challenged the assumption the Federal Reserve will
raise interest rates another two times in 2018. But yields
reversed course and steadied in the afternoon as doubts
moderated. 
    "CPI was much weaker than expected. The headline was less of
a surprise than the core reading. But when you look at the
pieces, there's less to that story as it was in healthcare and
in clothing prices primarily. Both of those should rebound in
the months ahead," said Stan Shipley, strategist at Evercore
ISI. 
    Market expectations of a September rate hike fell 3
percentage points to 95 percent following release of the CPI,
data, according to CME Group's FedWatch tool. Expectations of a
December hike also fell, to 77.8 percent from 81.4 percent on
Wednesday. But expectations were last at 78.4 percent, ticking
up alongside yields. 
    The yield on the 30-year U.S. government bond
rose on Thursday after the Treasury Department auctioned $15
billion in new supply to average demand.
    Primary dealers, who are responsible for absorbing any
supply not bought by direct or indirect bidders, took 27
percent, the smallest amount since April 2018.  
    Indirect bidders, who include fund managers and foreign
central banks, took 61.71 percent of the supply, lower than
62.25 percent in August and the average of 62.55 percent in the
12 months through August. Direct bidders took 11.29 percent,
higher than the 8.04 percent taken in August, which was the
lowest since February.
    The ratio of bids to the amount of 30-year debt offered - a
measure of overall demand - was 2.34, higher than 2.27 in August
but lower than the average of 2.39 in the 12 months through
August.
    The yield on the 30-year bond fell 2.9 basis
points following the CPI data release to 3.092 percent, before
recovering to 3.095 percent. The yield on the two-year note
 was last at 2.757 percent, up from a session low of
2.736 percent. The yield on the 10-year note was
last at 2.959, up from 2.944 percent earlier in the day. 
    
    September 13 Thursday 2:34PM New York / 1834 GMT
                               Price                  
 US T BONDS DEC8               142-14/32    0-5/32    
 10YR TNotes DEC8              119-120/256  0-8/256   
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.1025       2.143     -0.008
 Six-month bills               2.265        2.3229    0.005
 Two-year note                 99-192/256   2.7565    0.009
 Three-year note               99-204/256   2.8212    0.000
 Five-year note                99-124/256   2.8621    0.000
 Seven-year note               98-236/256   2.9222    -0.003
 10-year note                  99-72/256    2.959     -0.004
 30-year bond                  98-40/256    3.0949    -0.011
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        17.50         0.00    
 spread                                               
 U.S. 3-year dollar swap        15.75         0.00    
 spread                                               
 U.S. 5-year dollar swap        12.75         0.00    
 spread                                               
 U.S. 10-year dollar swap        6.75         0.25    
 spread                                               
 U.S. 30-year dollar swap       -6.00         0.75    
 spread                                               
 
      

 (Reporting by Kate Duguid; Editing by Bernadette Baum and Steve
Orlofsky)
  
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