TREASURIES-Yields drop after US consumer price data

(Adds quote in 7th paragraph, debt ceiling talks in 12th graph, 10-year note auction results in graphs 13-14; updates prices) By Karen Brettell NEW YORK, May 10 (Reuters) - U.S. Treasury yields fell on Wednesday after consumer price data for April came in roughly in line with economists' expectations, a relief to some investors who were concerned that price pressures may have been stronger than expected. In the 12 months through April, the Consumer Price Index (CPI) increased 4.9% after advancing 5.0% on a year-on-year basis in March. The core CPI gained 5.5% after advancing by 5.6% in March. "It came in actually as expected, but I think there may have been people looking for a stronger number, so that’s why we had a decent reaction," said Priya Misra, head of global rates strategy at TD Securities in New York. Benchmark 10-year note yields were last at 3.439%, down 8 basis points on the day, while two-year yields dropped 12 basis points to 3.904%. The inversion in the yield curve between two-year and 10-year notes narrowed to minus 47 basis points. The Federal Reserve is seen as likely to leave rates unchanged when it meets in June unless there is a surprise resurgence in price pressures.

That said, still high inflation could also make it unlikely that the Fed will cut rates anytime soon. "The details of the print suggest that we are still a meaningful distance from the Fed’s 2% target, giving little reason for the Fed to cut this year," Alexandra Wilson-Elizondo, Co-head of portfolio management for Multi Asset Solutions at Goldman Sachs Asset Management said in a note. "We believe the Fed will remain on hold for longer than markets are pricing."

Fed funds futures traders are pricing in a 97% likelihood that the Fed will leave rates unchanged at its June meeting, and also see around 78 basis points of rate cuts by year-end. The CPI report for May is due on June 13, one day before the Fed will conclude its two-day meeting. Ongoing concerns about the U.S. regional banking sector and the debt ceiling standoff, if it is not resolved, could also make the U.S. central bank more likely to pause rate hikes. One-month Treasury bill yields also hit a record high of 5.811% earlier on Wednesday as some investors avoided U.S. government debt that comes due when the Treasury could run out of funds, as Congress continues to negotiate on raising the debt ceiling. Detailed talks on raising the U.S. government's $31.4 trillion debt limit kicked off on Wednesday with Republicans insisting on deep spending cuts, the day after Democratic President Joe Biden and top congressional Republican Kevin McCarthy's first meeting in three months. The Treasury sold $35 billion in 10-year notes on Wednesday to average demand, the second auction of $96 billion in coupon-bearing supply this week.

The notes sold at a

high yield of 3.448% , less than a basis point above where they had traded before the auction. Demand was 2.45 times the amount of debt on offer, the highest since February. The government saw strong demand for $40 billion in three-year notes on Tuesday and will also sell $21 billion in 30-year bonds on Thursday.
May 10 Wednesday 3:00PM New York / 1900 GMT Price Current Net Yield % Change (bps) Three-month bills 5.08 5.2176 -0.063 Six-month bills 4.9 5.1082 -0.051 Two-year note 99-242/256 3.9036 -0.120 Three-year note 100-46/256 3.5613 -0.128 Five-year note 100-148/256 3.3725 -0.122 Seven-year note 100-160/256 3.3984 -0.102 10-year note 100-128/256 3.4388 -0.083 20-year bond 100-4/256 3.8735 -0.058 30-year bond 96-240/256 3.7974 -0.052
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 21.50 -0.25
spread
U.S. 3-year dollar swap 17.25 3.25
spread
U.S. 5-year dollar swap 9.25 0.50
spread
U.S. 10-year dollar swap 1.00 0.75
spread
U.S. 30-year dollar swap -43.25 0.25
spread

(Reporting by Karen Brettell; Additional reporting by Herb Lash in New York; Editing by Andrew Heavens, Andrea Ricci and Diane Craft)