May 10, 2018 / 2:50 PM / 2 months ago

TREASURIES-U.S. bond yields fall on weaker-than-expected April CPI

(New throughout, updates prices, yields, market activity and comments)

By Kate Duguid

NEW YORK, May 10 (Reuters) - U.S. Treasury yields fell on Thursday as a smaller-than-expected increase in the consumer price index in April reduced fears that domestic inflation is picking up steam as the labor market tightens.

The 10-year Treasury yield fell to 2.964 percent in morning trade, after having broken below 3 percent Wednesday. The rise in oil prices this week on the back of President Donald Trump’s announcement he would pull out of the Iran nuclear deal drove up Treasury yields this week ahead of the CPI report.

While oil prices contribute to the headline inflation number, they are excluded from the core inflation number that the Federal Reserve looks at to determine interest rates. Thursday’s weak core inflation number is “not enough to derail the Fed’s June hike, but points toward lower rates further out the curve,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

The Labor Department reported its consumer price index rose 0.2 percent after slipping 0.1 percent in March. In the 12 months through April, the CPI increased 2.5 percent, the biggest gain since February 2017, after rising 2.4 percent in March.

Excluding the volatile food and energy components, the CPI edged up 0.1 percent after two straight monthly increases of 0.2 percent. The so-called core CPI rose 2.1 percent year-on-year in April, matching March’s increase.

Core inflation remains so low because wages not risen substantially even with jobless claims near a 48-year low. Real average hourly earnings were flat in April, and rose just 0.2 percent year over year, the Labor Department also reported on Thursday.

Some analysts remained nonplussed. “We think this is a temporary aberration. Our expectation is that with unemployment at such subdued levels, lots of job creation, and at a time when the economy is operating at full employment, this will inevitably place upward pressure on wages,” said Candice Bangsund, vice president and portfolio manager, global asset allocation at Fiera Capital Corporation in Montreal, Quebec.

At 10:26 a.m. (1526 GMT), the yield on benchmark 10-year Treasury notes was 2.964 percent, down 4 basis points from Wednesday’s close. The 30-year yield was 3.129 percent, down 2.5 basis points from its last close. The two-year yield shaved off 1.2 basis points and was last at 2.518 percent. (Reporting by Kate Duguid and Richard Leong; Editing by David Gregorio)

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