June 17, 2014 / 3:25 PM / 4 years ago

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

(Adds quote, 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 bln 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 positive, even though the main
inflation gauge watched by the Fed continues to run below the
U.S. central bank's 2 percent target.
    "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.
    Investors are focused on the Federal Reserve's monetary
policy statement on Wednesday, when the U.S. central bank is
expected to announce it will continue paring its bond purchase
program and cut its growth projections.
    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
are 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 that Britain could become the
first major economy to tighten monetary policy since the 2008
financial crisis. 
    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 strong inflation data may also help demand when the
Treasury sells $13 billion in new 30-year Treasury
Inflation-Protected Securities on Thursday.
    The Fed bought $1.03 billion in bonds due from 2036 to 2044
on Tuesday as part of its ongoing purchases.

 (Editing by Clive McKeef and Chizu Nomiyama)
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