NEW YORK, Sept 13 (Reuters) – Treasury yields fell on Wednesday after the underlying pace of inflation eased in August, suggesting the Federal Reserve will raise interest rates next week despite the biggest rise in consumer prices in the United States could remain unchanged for a year.
* The consumer price index (CPI) rose 0.6% last month, the largest increase since June 2022, the Labor Department said, after rising just 0.2% per month in the previous two months.
* Gasoline prices rose 10.6% while the consumer price index rose 3.7% in the 12 months to August, after rising 3.2% in July.
* However, core inflation, which worries the Fed more because it excludes food and energy prices, was 4.3% year-on-year in August, compared with 4.7% the previous month.
* The muted reaction to the CPI report reflects the fact that the bond market is finally embracing the Fed’s mantra that interest rates will stay higher for longer, said Kevin Flanagan, head of fixed income strategy at WisdomTree.
* The futures market is betting that the Fed’s overnight interest rate will reach nearly 5.45% in December and not fall below 5% until the end of July 2024, with significant rate cuts not coming until the second half of next year.
* The two-year Treasury yield, which reflects interest rate expectations, fell 3.2 basis points to 4.973%, while the benchmark 10-year bond yield fell 2.5 basis points to 4.239%.
* The yield spread between two-year and 10-year bonds remained inverted at -73.7 basis points, as the shorter-term yields higher than the longer-term. The trend reversal, which began in July 2022, is considered a harbinger of a recession for a long time.
* The Treasury sold $20 billion of 30-year bonds at a maximum interest rate of 4.345%.
* The 30-year Treasury yield fell 1.7 basis points to 4.329%.
