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Interest rate sensitive two-year yields rise before CPI

report

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Benchmark 10-year note yields edge lower

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Traders watching potential peace deal for Russia, Ukraine

By Karen Brettell

Aug 11 (Reuters) - Benchmark 10-year U.S. Treasury

yields edged lower while interest rate sensitive two-year yields

were the highest in a week on Monday before Tuesday's highly

anticipated consumer price inflation report for July.

Yields tumbled after jobs data for July showed that

employers added fewer jobs than expected last month, while job

gains for previous months were also revised sharply lower.

Traders are now pricing in 88% odds that the Federal Reserve

will cut rates at its next meeting in September, but the

prospect of a renewed uptick in inflation is seen complicating

the interest-rate outlook.

Fed Chair Jerome Powell has said that he anticipates prices

to rise this summer as a result of President Donald Trump's

tariff policies.

A weakening consumer, however, would likely dent inflation

increases, said Thomas Simons, chief U.S. economist at Jefferies

in New York.

"I don't understand how we can have this mentality that the

consumer is completely tapped out and not able to continue to

drive growth, but at the same time that pricing power is going

to be maintained on both the goods and services side," Simons

said.

"My view is more that if we do have tariff-driven inflation

that pushes goods prices up, that's going to reduce demand for

something else, whether that's other goods or services. And

thus, the pricing power is going to be weakened, and we'll see

some offsetting declines in prices that limits the overall

inflation pressure," he added.

Economists polled by Reuters expect Tuesday's inflation

report to show that headline inflation rose by 0.2% last month

for an annual gain of 2.8%, while core prices rose by 0.3% for

an annual increase of 3.0%.

The yield on benchmark U.S. 10-year notes was

last down 1 basis points on the day at 4.273%.

The 2-year note yield rose 0.8 basis point to

3.766%.

The yield curve between two-year and 10-year notes flattened

by around one basis point to 51 basis points.

Traders are also focused on talks for a potential peace deal

between Russia and Ukraine.

Ukrainian President Volodymyr Zelenskiy won diplomatic

backing from Europe and the NATO alliance on Sunday ahead of a

Russia-U.S. summit this week where Kyiv fears President Vladimir

Putin and President Donald Trump may try to dictate terms for

ending the 3-1/2-year war.