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U.S. headline CPI rises 0.1%, core inflation up 0.4%
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Fed funds futures still pricing in 25-bp rate hike in May
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U.S. 2/10 yield curve narrows inversion after CPI data
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Fed's Barkin says waiting for inflation to crack
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Minutes show Fed projecting mild recession this year
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U.S. 10-year auction shows lackluster results
By Gertrude Chavez-Dreyfuss NEW YORK, April 12 (Reuters) - U.S. Treasury yields eased on Wednesday, after a sharp fall earlier, as data showing cooler-than-expected headline inflation for March but still elevated core consumer prices suggested the Federal Reserve could still raise interest rates at the next policy meeting - but may pause after that. Minutes from the last Fed meeting had a dovish tone. Several Fed officials last month considered
pausing interest rate increases until it was clear the failure of two regional banks would not cause wider financial stress. But those officials ultimately concluded high inflation remained the priority.
The minutes also showed staff projections of a mild recession later this year.
The market, however, hardly moved on the minutes.
The U.S. yield curve lessened its inversion after Wednesday's inflation data, which showed that traders have started to price out rate hikes this year. The spread between the U.S. two-year and 10-year yields narrowed to -55.90 basis points (bps) , from about -64 bps before the data. Data showed the U.S. consumer price index rose 0.1% last month after advancing 0.4% in February. In the 12 months through March, the CPI increased 5.0%, the smallest year-on-year gain since May 2021. Economists polled by Reuters had forecast the CPI gaining 0.2% last month and advancing 5.2% year-on-year. Core inflation, however, remained elevated. Excluding the volatile food and energy components, the CPI increased 0.4% last month after rising 0.5% in February. Sticky rents continued to drive core CPI. "An estimate of the Fed Chair's latest favorite inflation indicator, core services less housing, fell but remained elevated, keeping expectations for at least one more rate hike alive for May," said Ellis Phifer, managing director, fixed income capital markets, at Raymond James in Memphis, Tennessee. "The bond market's initial elated thrust has been softening, as the market does not believe the inflation data today will throw the Fed off course." Richmond Fed President Thomas Barkin also poured cold water on views that the Fed could hold rates steady next month with headline inflation slowing. "I'm waiting for inflation to crack. ... It's moving in the right direction ... but, in the absence of a month or two months or three months with inflation at our target, it's hard to make the case that we're compellingly headed there," Barkin said in an interview with broadcaster CNBC on Wednesday. In afternoon trading, U.S. 10-year yields fell 2.3 bps to 3.411%. U.S. two-year yields also slid, down 9.2 bps at 3.966% . U.S. rate futures have priced in a roughly 76% chance of a 25-bp rate hike next month. In the wake of the CPI data, the breakeven inflation rates slid across the curve.
The breakeven rate on two-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.442%, down 10.8 bps, indicating the market sees inflation averaging this percentage over the next two years. Also on Wednesday, the U.S. Treasury's auction of $32 billion in 10-year notes was underwhelming. The high yield stopped at 3.455%, higher than what the market expected at the bid deadline and suggesting that investors demanded a higher premium to hold the note.
The bid-to-cover ratio, a gauge of demand, was 2.36, slightly higher than 2.35 last month, but lower than the 2.66 from February and the 2.42 average.
April 12 Wednesday 3:16PM New York / 1916 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.87 4.9992 -0.035
Six-month bills 4.7575 4.956 -0.029
Two-year note 99-212/256 3.9662 -0.092
Three-year note 100-38/256 3.6971 -0.103
Five-year note 100-182/256 3.4677 -0.082
Seven-year note 101-44/256 3.4342 -0.058
10-year note 100-188/256 3.4111 -0.023
20-year bond 101-168/256 3.7556 0.009
30-year bond 99-172/256 3.6429 0.022
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 31.00 0.00
spread
U.S. 3-year dollar swap 18.75 1.50
spread
U.S. 5-year dollar swap 7.50 0.00
spread
U.S. 10-year dollar swap -1.25 -1.00
spread
U.S. 30-year dollar swap -43.75 -1.50
spread
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis and Nick Zieminski)
Messaging: rm://gertrude.chavez.reuters.com@reuters.net))