September 14, 2017 / 6:12 PM / 10 months ago

REFILE-TREASURIES-U.S. yields rise as CPI data bolster Dec rate-hike view

 (Corrects day of week in first paragraph)
    * U.S. consumer prices post biggest rise in seven months in
    * Futures imply traders now see Dec rate hike back up to 50
    * U.S. yield curve moves to flattest level in over two weeks

    By Richard Leong
    NEW YORK, Sept 14 (Reuters) - U.S. Treasury yields rose on
Thursday, with the two-year yield hitting a seven-week peak as
domestic consumer prices grew at their briskest pace in seven
months, rekindling bets the Federal Reserve would raise interest
rates for a third time in 2017.
    Longer-dated yields rose less than their short-dated
counterparts, reflecting the view that the Fed's pace of raising
short-term rates would be faster than underlying inflation
    "The number came in higher than expected. It gives the Fed a
little more room to raise rates on the short-end," said Justin
Hoogendoorn, head of fixed income strategy and analytics at
Piper Jaffray in Chicago.
    The consumer price index, the government's broadest
inflation gauge, rose 0.4 percent in August, faster than the 0.3
percent increase forecast among analysts polled by Reuters.
    That lifted the CPI's year-over-year increase to 1.9 percent
from 1.7 percent in July.
    But the so-called core CPI, which excludes volatile energy
and food prices, rose 1.7 percent on a 12-month basis and
remained stuck below the Fed's 2 percent goal for underlying
    "In the long term, we see slower business activities and
inflation expectations coming down," Hoogendoorn said.
    Still, the latest CPI data revived expectations the U.S.
central bank may consider hiking interest rates at its Dec.
12-13 meeting if subsequent data support the case that inflation
is accelerating.
    Interest rates futures implied traders saw more than a 50
percent chance of rate increase in December, the highest since
July, based on data from CME Group's FedWatch program.
    The U.S. central bank raised key short-term rates in March
and June. Its current target range has been 1.00-1.25 percent.
    Fed policymakers will meet on Sept. 19-20 and are expected
to leave rates unchanged and announce their plan to reduce the
central bank's $4.2 trillion holdings of Treasuries and
mortgage-backed securities.
    At 1:25 p.m. (1725 GMT), the yield on two-year Treasury
notes, which is sensitive to traders' view on Fed
policy, was up 2 basis points at 1.372 percent. It touched 1.388
percent earlier on Thursday, which was its highest since July
26, Reuters data showed.
    The benchmark 10-year yield hit a three-week
peak at 2.225 percent before retreating to 2.202 percent, up 0.7
basis point from late on Wednesday.
    The yield spread between five-year and 30-year Treasuries
 shrank to 99 basis points, the tightest in about
2-1/2 weeks, according to Tradeweb.
  September 14 Thursday 1:42PM New York / 1742 GMT
 US T BONDS DEC7               154-28/32    0-2/32    
 10YR TNotes DEC7              126-92/256   -0-24/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.0375       1.0546    0.011
 Six-month bills               1.15         1.1728    0.008
 Two-year note                 99-196/256   1.3716    0.017
 Three-year note               99-156/256   1.5087    0.024
 Five-year note                99-52/256    1.7936    0.020
 Seven-year note               99-16/256    2.02      0.010
 10-year note                  100-108/256  2.2023    0.007
 30-year bond                  99-68/256    2.7863    -0.009
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        24.50         0.75    
 U.S. 3-year dollar swap        20.50         0.25    
 U.S. 5-year dollar swap         7.75         0.50    
 U.S. 10-year dollar swap       -3.50         1.00    
 U.S. 30-year dollar swap      -33.25         1.00    

 (Reporting by Richard Leong; Editing by Meredith Mazzilli and
Chizu Nomiyama)
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