September 14, 2017 / 2:13 PM / in 9 months

TREASURIES-U.S. yields rise as CPI data revives rate-hike view for December

    By Richard Leong
    NEW YORK, Sept 14 (Reuters) - U.S. Treasury yields rose on
Wednesday, with the two-year yield hitting a seven-week peak as
a stronger-than-forecast increase in domestic consumer prices
rekindled 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 Fed's pace of hikes on
short-term rates would be faster than underlying inflation
    "The data help the case for following up the start of Fed
balance sheet normalization next week with another rate hike in
December, although there will be three more CPI reports before
the December decision is made," said Jim O'Sullivan, chief U.S.
economist at High Frequency Economics in Valhalla, New York.
    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
    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.
    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 9:50 a.m. (1350 GMT), the yield on two-year Treasury
notes, which is sensitive to traders' view on Fed
policy, was up 2.5 basis points at 1.380 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 2.204 percent, up 1
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 9:50AM New York / 1350 GMT
 US T BONDS DEC7               154-30/32    0-4/32    
 10YR TNotes DEC7              126-100/256  -0-16/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.0275       1.0445    0.000
 Six-month bills               1.145        1.1676    0.003
 Two-year note                 99-194/256   1.3757    0.021
 Three-year note               99-156/256   1.5087    0.024
 Five-year note                99-56/256    1.7903    0.016
 Seven-year note               99-20/256    2.0176    0.008
 10-year note                  100-120/256  2.197     0.002
 30-year bond                  99-76/256    2.7847    -0.010
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        24.50         0.75    
 U.S. 3-year dollar swap        20.75         0.50    
 U.S. 5-year dollar swap         7.75         0.50    
 U.S. 10-year dollar swap       -3.75         0.75    
 U.S. 30-year dollar swap      -33.25         1.00    

 (Reporting by Richard Leong; Editing by Meredith Mazzilli)
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