* June CPI rose 3.5% on year-over-year basis, down 0.4% on
the month
* July rate hike odds fell to 13.4% from 41.7%, CME Group's
FedWatch tool showed
* Fed's Warsh says central bank has no tolerance for
inflation
By Chuck Mikolajczak
NEW YORK, July 14 (Reuters) - U.S. Treasury yields fell on
Tuesday after data showed consumer inflation slowed more than
expected in June, denting market expectations for a near-term
rate hike from the Federal Reserve.
The Labor Department said the Consumer Price Index increased
3.5% in the 12 months through June after surging 4.2% in May,
the largest year-on-year rise since April 2023. On a monthly
basis, CPI fell 0.4% after a 0.5% increase in May. Economists
polled by Reuters had forecast the CPI would rise 3.8% on a
year-over-year basis and dip 0.1% on a monthly basis.
"The more important thing for consumer sentiment is that
energy number. Regular unleaded gasoline prices were still up
more than 27% from a year ago even with the 10% drop in prices
in June," said Brian Jacobsen, chief economist at Annex Wealth
Management in Menomonee Falls, Wisconsin.
"Headline CPI is hot, but it's not rotten to the core."
The yield on the benchmark U.S. 10-year Treasury note
fell 3.7 basis points, on pace for its biggest
daily drop since June 24, to 4.573%, after falling to 4.526%.
CRUDE CLIMBS ON MIDDLE EAST CONCERNS
Energy prices have come down in recent weeks on expectations
that a durable peace deal could be reached between the U.S. and
Iran. However, hostilities have intensified in recent days and
caused a reversal in crude prices.
U.S. crude rose 3.28% to $80.70 a barrel and Brent
climbed to $86.91 per barrel, up 4.35% on the day. The
two benchmarks touched four-week highs after the U.S. reimposed
a naval blockade of Iran and as renewed attacks between
Washington and Tehran exacerbated supply concerns.
The yield on the 30-year bond shed 0.7 basis
point to 5.091% after dropping to 5.05%.
Expectations for a rate hike of at least 25 basis points from
the Fed at its July 28-29 meeting tumbled to 13.4% from 41.7% in
the prior session, according to CME Group's FedWatch tool. For
the central bank's September 15-16 meeting, markets are pricing
in a 58.1% chance of a hike, down from 75.1% on Monday.
A closely watched part of the U.S. Treasury yield curve
measuring the gap between yields on two- and 10-year Treasury
notes, seen as an indicator of economic
expectations, was at a positive 38 basis points.
Several Fed officials have in recent weeks flagged concerns
about inflation pressures while playing down any labor market
worries. On Monday, Federal Reserve Governor Christopher Waller
said the central bank may need to raise interest rates "in the
near term" if coming data show inflation continuing well above
the central bank's 2% target.
Fed Chairman Kevin Warsh said in prepared comments on Tuesday to
the U.S. House of Representatives Financial Services Committee
that the central bank "has no tolerance for persistently
elevated inflation."
The two-year U.S. Treasury yield, which
typically moves in step with interest rate expectations for the
Fed, fell 7.2 basis points to 4.191% after dropping to 4.147%,
and was on track for its biggest daily decline since May 26.
The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.259% after closing at 2.329% on July 13.
The 10-year TIPS breakeven rate was last at
2.239%, indicating the market sees inflation averaging about
2.2% a year for the next decade.