TREASURIES-Yields rise as U.S. consumer price inflation jumps

Tue Jun 17, 2014 2:51pm EDT

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(Adds quotes, details, updates prices)
    * Prices drop as inflation higher than expected
    * CPI raises fears of more hawkish Fed
    * Fed holds policy meeting, statement on Wednesday in focus
    * Fed buys $1.03 billion bonds due 2036-2044

    By Karen Brettell
    NEW YORK, June 17 (Reuters) - U.S. Treasuries prices fell on
Tuesday after consumer prices recorded their largest increase in
more than a year, which may give the Federal Reserve more
confidence in adopting a hawkish tone when it meets this week.
    The Labor Department said on Tuesday its consumer price
index increased 0.4 percent last month, with food prices posting
their biggest rise since August 2011. 
    Low inflation has posed a problem for the Fed's ability to
raise interest rates as economic growth continues. A rise in
inflation is likely to be seen as giving the U.S. central bank
more policy flexibility, even though the main inflation gauge
watched by the Fed continues to run below its 2 percent target.
    "The market was trading like it was going to be more benign,
it's a little bit more volatile going into tomorrow's meeting,"
said Sean Murphy, a Treasuries trader at Societe Generale in New
York.
    Investors are focused on the Fed's monetary policy statement
on Wednesday, when the U.S. central bank is expected to announce
it will continue paring its bond purchase program.
 
    The timetable for when each member of the Federal Open
Market Committee expects policy to begin tightening, and how
quickly, will be keenly scrutinized, as will any comments about
interest rate hikes or slack in the economy from Fed Chair Janet
Yellen, who is due to speak after the statement from the meeting
is released.
    Investors have been more wary of central banks becoming more
hawkish since Bank of England Governor Mark Carney surprised
markets last Thursday by saying Britain could become the first
major economy to tighten monetary policy since the 2008
financial crisis.   
    "It was a much stronger print than the market was expecting
and many are thinking that that may lead to a more hawkish tone
tomorrow," said Michael Pond, head of global inflation-linked
research at Barclays in New York.
    "The Fed was patient with low inflation because they thought
it was influenced by transient factors, and the recent data
proves they are right. They are abating," Pond said.
    Benchmark 10-year notes fell 13/32 in price to
yield 2.65 percent, up from 2.60 percent late on Monday.
Thirty-year bonds dropped 24/32 in price to yield
3.44 percent, up from 3.40 percent.
    Two-year note yields, which are highly sensitive
to Fed policy, also rose, to 0.48 percent, the highest since
April 4.
    The Fed is also seen as likely to reduce its growth
estimates, however, which could boost bond prices and provoke
new covering of short positions if the central bank is seen as
holding rates at record lows for longer.
    The Fed bought $1.03 billion in bonds due 2036 to 2044 on
Tuesday as part of its ongoing purchases.

 (Editing by Clive McKeef, Chizu Nomiyama and James Dalgleish)
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