August 31, 2017 / 7:15 PM / 4 months ago

TREASURIES-Yields fall on weak inflation, North Korea tensions

(Adds Mnuchin comments, updates prices)

* Data shows continued weakness in inflation

* North Korean tensions keep demand for bonds

* Friday’s employment report in focus

* Debt ceiling concerns weigh on Treasury bills

By Karen Brettell

NEW YORK, Aug 31 (Reuters) - U.S. Treasury prices gained on Thursday after consumer spending data showed continuing low inflation, and as tensions with North Korea kept up demand for the safe haven bonds.

The core personal consumption expenditures (PCE) price index increased 1.4 percent in the 12 months through July, the smallest year-on-year increase since December 2015.

“After a run of low numbers, and given that June was the last one that didn’t disappoint to the downside, there were people thinking maybe we will get a small upside surprise,” said Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee. “Not this time.”

Benchmark 10-year notes gained 7/32 in price to yield 2.121 percent, down from 2.145 percent on Wednesday.

Escalated tensions between the U.S. and North Korea also boosted demand for Treasuries.

South Korean and Japanese jets joined exercises with two U.S. nuclear-capable bombers above and near the Korean peninsula on Thursday, two days after North Korea fired a missile over Japan.

Trading volumes were relatively low, however, with some investors reluctant to buy Treasuries given that yields are near their lowest levels since November.

“People have been nervous about the levels for the last two weeks, which is one of the reasons you’ve seen volume really fall back,” said Vogel.

Friday’s employment report for August is the next major economic focus. Employers are expected to have added 180,000 jobs in the month, according to the median estimate of 93 economists polled by Reuters.

Wage data will be watched by investors for further indications on inflation.

Central bank meetings next month are also in focus, with the European Central Bank under the most scrutiny for any indications that it is near a decision to pare its asset purchases.

Rapid gains by the euro against the dollar are worrying a growing number of policymakers at the ECB, raising the chance its asset purchases will be phased out only slowly, three sources familiar with discussions told Reuters.

Yields on Treasury bills due in early October rose on concerns about the debt ceiling.

U.S. Treasury Secretary Steven Mnuchin said on Thursday that Hurricane Harvey could bring forward the deadline by which the nation’s debt ceiling needs to be raised.

The Treasury Department also said it would sell $25 billion in cash management bills due next week.

Yields on bills due on Oct. 5 rose to 1.12 percent, from a session low of 1.06 percent. (Editing by Chizu Nomiyama) )

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