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TREASURIES-Yields advance on Fed rate hike outlook
December 15, 2016 / 3:24 PM / a year ago

TREASURIES-Yields advance on Fed rate hike outlook

* U.S. CPI data show tame inflation

* Jobless claims, Philly Fed business index positive overall

* Fed fund futures pricing gradual rate hike pace (Adds comments, byline, updates prices,)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 15 (Reuters) - U.S. Treasury yields rose broadly on Thursday, boosted by the prospect of more interest rate increases by the Federal Reserve next year, although those on long-dated bonds came off their highs after fairly tame consumer inflation data for November.

Benchmark U.S. 10-year yields hit more than two-year highs, while yields on U.S. two-year notes touched more than seven-year peaks, bolstered by the outlook for higher interest rates.

The belly of the yield curve also climbed to multi-year peaks, with U.S. five-year notes rising to their strongest level in 5-1/2 years and seven-year notes hitting almost three-year highs.

The Fed’s policy-setting committee, which raised rates by a quarter point on Wednesday, said it anticipates three more rate increases in 2017, a jump from the September meeting when it said it expected just two hikes.

“It is the Fed’s updated projections for three rate hikes next year, revised from two before, followed by three more rate hikes in 2018, that will mark the actual beginning of normalization,” said Lena Komileva, chief economist at G+ Economics in London,

Yields, however, came off their highs after the release of soft U.S. inflation data.

The consumer price index rose just 0.2 percent last month, after advancing 0.4 percent in October. Gasoline price increases slowed and food costs remained soft during the month, pulling the index lower.

“Core inflation remains tame ... although the data still show at least modest acceleration on a trend basis,” said Jim O‘Sullivan, chief U.S. economist at High Frequency Economics in New York.

That said, other pieces of data such as initial jobless claims and the Philadelphia Federal Reserve business index were solid overall, but had little impact on yields.

The U.S. data on Thursday backed the Fed’s hawkish stance on the economy and rates.

Fed funds futures are showing a gradual rate hike path so far, with about a 40 percent chance for a quarter-point tightening by the March meeting, and about a 50 percent probability for a May rate increase.

In mid-morning trading, benchmark 10-year Treasury prices were down 12/32, yielding 2.567 percent, up 4 basis points from levels late on Wednesday.

U.S. 30-year bond yields were yielding 3.149 percent, up slightly from the previous session.

U.S. two-year notes yielded 1.2636 percent, up almost 3 basis points from Wednesday.

The yield curve was also flatter, with the spread between the U.S. 5-year notes and 30-year bonds at around 107 basis points, a nod to the additional rate hikes forecasted by the Fed. That’s the flattest curve since early September. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Paul Simao)

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