* Bargain-hunting after refunding fuels U.S. bond appetite
* Weaker-than-expected CPI raise doubts on number of rate
* Fed's Evans says could be okay with one more hike in 2017
* U.S. yields retreat from highest levels since March
(Updates market action, adds quote)
By Richard Leong
NEW YORK, May 12 The U.S. Treasuries market
rallied on Friday with the benchmark yield posting its biggest
one-day drop in more than three weeks, as weaker-than-expected
consumer inflation data in April diminished the view on whether
Federal Reserve would raise interest rates more than once for
the rest of the year.
Demand for Treasuries was also stoked by bargain-minded
investors after a lukewarm reception this week to the $62
billion sale of three-year, 10-year and 30-year government debt,
analysts and traders said.
"With the CPI report today, the market is concerned about
inflation," said Thomas Roth, head of Treasury trading at MUFG
Securities America in New York.
The Consumer Price Index grew 2.2 percent on a 12-month
basis through April, slower than March's 2.4 percent gain. This
raised concerns the core rate of personal consumption
expenditure would take longer than previously thought for
inflation to reach the Fed's 2-percent goal.
The core PCE, the Fed's preferred inflation gauge, increased
1.6 percent on a year-over-year basis in March.
The benchmark 10-year Treasury yield fell 7
basis points to 2.329 percent. On Thursday, it reached 2.423
percent, a near six-week peak, in reaction to data showing a
surprisingly strong jump in U.S. producer prices in April.
U.S. yields rose broadly earlier this week on heavy
government and corporate bond supply. In addition, centrist
Emmanuel Macron's presidential win in France last Sunday spurred
investors to reduce their safe-haven bond holdings, propelling
yields to their highest level since March on Thursday.
Last month's below-forecast retail sales and consumer price
figures did not alter expectations that the Federal Reserve may
raise interest rates at its June 13-14 meeting by a quarter
point to 1.00-1.25 percent.
However, the data trimmed the view that the Fed could
squeeze in at least one more rate hike after June and before
year-end as investors scaled back their expectations of a strong
bounce from anemic economic growth in the first quarter.
"The market thinks a rate hike in June is pretty much a done
deal, but a rate hike after that and tapering at the end of
year?," Roth said. "The market is always skeptical of this Fed.
This CPI report makes some think the Fed will cave."
Chicago Fed President Charles Evans said on Friday he could
be okay with more rate increase in 2017, while the Fed would
soon need to begin considering the shrinking of its $4.5
trillion balance sheet.
The interest rate futures market implied traders saw a 46
percent chance for two more rate hikes from the Fed by year-end
, down from 54 percent before Friday's data, CME Group's
FedWatch tool showed.
As of Friday, May 12, at 1510 EDT (1910 GMT):
US T BONDS JUN7 151-17/32 0-29/32
10YR TNotes JUN7 125-132/256 0-152/25
Price Current Net
Yield % Change
Three-month bills 0.8675 0.8814 -0.003
Six-month bills 1.0075 1.0266 -0.010
Two-year note 99-234/256 1.2945 -0.053
Three-year note 100-8/256 1.4893 -0.067
Five-year note 100-30/256 1.8501 -0.076
Seven-year note 99-32/256 2.1359 -0.073
10-year note 100-104/256 2.3292 -0.071
30-year bond 100-64/256 2.9873 -0.052
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 23.75 -1.25
U.S. 3-year dollar swap 19.75 -0.25
U.S. 5-year dollar swap 6.50 0.25
U.S. 10-year dollar swap -8.25 0.00
U.S. 30-year dollar swap -46.75 -0.50
(Reporting by Richard Leong; Editing by W Simon and Diane