September 13, 2018 / 1:33 PM / 6 months ago

TREASURIES-Yields fall to session lows after inflation data disappoints

 (Updates headline, lead paragraph, rates; adds auction news,
analyst quotes)
    By Kate Duguid
    NEW YORK, Sept 13 (Reuters) - U.S. Treasury yields across
maturities dropped to session lows in morning trading on
Thursday after data showed U.S. consumer prices rose less than
expected in August, moderating expectations that the Federal
Reserve will raise interest rates another two times in 2018. 
    The Labor Department said its consumer price index increased
0.2 percent last month after a similar gain in July, with the
year-over-year number slowing to 2.7 percent from 2.9 percent,
as increases in gasoline and rent were offset by declines in
healthcare and apparel costs. Underlying inflation pressures
also appeared to be slowing. 
    Excluding the volatile food and energy components, the CPI
edged up 0.1 percent. The so-called core CPI had increased by
0.2 percent for three straight months. In the 12 months through
August, the core CPI increased 2.2 percent after rising 2.4
percent in July.
    The Fed is widely expected to raise interest rates at its
policymaking meeting in September, but a fourth rate hike in
December remains an open question that depends, in part, on
where inflation falls in relation to the central bank's 2
percent target. 
    Market expectations of a September hike fell on Thursday to
95 percent from 99.2 percent a day earlier, according to CME
Group's FedWatch tool. Expectations of a December hike also fell
modestly from 80.4 percent on Wednesday to 77.8 percent after
the data release. 
    Still, some analysts were not deterred. 
    "CPI was much weaker than expected. The headline was less of
a surprise than the core reading. 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.   
    Strong demand at an auction of $15 billion 30-year notes
later in the day could also drive prices up at the long end of
the curve, tamping down yields. The U.S. Treasury Department on
Wednesday sold $23 billion of 10-year government notes amid
robust demand.
    "The 10-year demand was better than we expected to hear. We
have the 30-year yield well over 3 percent, and now with
inflation being an issue, I would expect demand to be good in
that space too," said Shipley. 
    The yield on the 30-year bond fell 2.9 basis
points following the CPI data release to 3.092 percent. The
yield on the two-year note fell to 2.740 percent from
a high of 2.773 earlier in the day. The 10-year note yield
 was last at 2.952, down from a session high of 2.983
      September 13 Thursday 9:18AM New York / 1318 GMT
 US T BONDS DEC8               142-21/32    0-12/32   
 10YR TNotes DEC8              119-144/256  0-32/256  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.1025       2.143     -0.008
 Six-month bills               2.265        2.3229    0.005
 Two-year note                 99-200/256   2.74      -0.008
 Three-year note               99-214/256   2.8075    -0.014
 Five-year note                99-146/256   2.8433    -0.019
 Seven-year note               99-8/256     2.9046    -0.020
 10-year note                  99-104/256   2.9443    -0.019
 30-year bond                  98-80/256    3.0867    -0.019
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        17.75         0.25    
 U.S. 3-year dollar swap        15.50        -0.25    
 U.S. 5-year dollar swap        12.75         0.00    
 U.S. 10-year dollar swap        6.75         0.25    
 U.S. 30-year dollar swap       -6.50         0.25    

 (Reporting by Kate Duguid; Editing by Bernadette Baum)
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