June 12, 2019 / 6:13 PM / 6 days ago

TREASURIES-U.S. yield curve steeper as soft inflation spurs rate cut bets

(Adds auction news, analyst quote, updates yields)

By Kate Duguid

NEW YORK, June 12 (Reuters) - The U.S. Treasury yield curve was steeper on Wednesday after soft inflation data pulled short-dated yields lower, indicating increased expectations that the Federal Reserve will cut interest rates.

Consumer prices barely rose in May, the Labor Department reported. There was, however, some evidence of inflation in rising rent and healthcare costs, which could buy the central bank some time before easing monetary policy.

“I don’t think this signals an inflation slump or anything. But it’s still going to fuel expectations of ease,” said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets.

Fed policymakers will meet June 18-19 against the backdrop of rising trade tensions, slowing growth and a sharp step-down in hiring in May that led financial markets to price in at least two interest rate cuts in 2019.

The two-year yield, which is a proxy for market expectations of rate cuts, was last 3.3 basis points lower at 1.888%. At the long end, the benchmark 10-year yield was 1.6 basis point lower at 2.124%. The spread between the two- and 10-year yields, the most common measure of the yield curve, rose to 23.7 basis points, from its close Tuesday at 21.3.

Expectations of a rate cut in July rose from the day prior, last at 69.1%, according to CME Group’s FedWatch tool. Expectations of two cuts by July also rose slightly, from 12.4% Tuesday to 17.2% currently.

Investors are unlikely to make big moves ahead of the Fed’s meeting next week. Referring to the last Federal Open Market Committee statement, which said policymakers would be “patient” about tightening monetary policy, Cloherty said: “If they remove ‘patient,’ people will assume a rate cut is a done deal. If they keep it, it will leave some doubt.”

Also on Wednesday, the Treasury Department auctioned off $24 billion of 10-year notes. Demand rebounded from the weak showing in May and was in line with averages. The fresh supply sold at a high yield of 2.13%, the lowest it has been since November 2016, in line with the trend in the 10-year yield. Ultimately, yields were little moved by the auction.

At the far end of the curve, the 30-year yield was up 0.3 basis point, last at 2.619%.

Looking ahead, “focus will continue to turn to headlines surrounding trade. Also in focus the remainder of the week will be the $16 billion 30-year auction tomorrow (Thursday) and retail sales on Friday,” wrote Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald. (Reporting by Kate Duguid; Editing by Will Dunham)

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