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Core PCE seen lower after inflation data

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US rate futures price in 31 bps in cuts in 2025

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US two-year breakeven inflation rises to highest since

2022

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Focus on US 30-year bond auction

(Recasts, updates prices; adds US data, byline, previous

dateline LONDON)

By Gertrude Chavez-Dreyfuss and Amanda Cooper

NEW YORK/LONDON, Feb 13 (Reuters) - U.S. Treasury yields

fell on Thursday after certain components in the January

Producer Price Index pointed to lower inflation, suggesting that

the Federal Reserve remained on track to cut interest rates

later this year.

U.S. PPI rose 0.4% after an upwardly revised 0.5% gain

in December, but key elements in the computation of the core

Personal Consumption Expenditures (PCE) index, which the Fed

tracks, were actually benign or lower.

Components like physician's office and hospital prices

were either broadly unchanged or rose just slightly. Healthcare,

with a nearly 20% weighting in the core PCE, declined 0.06%.

Portfolio management prices, another important item on

core PCE, posted a modest 0.4% increase.

"It looks like core PCE will come out at around 0.3%,

which is still high, whereas in January of last year, it was

0.5%. If that forecast is correct, core PCE is going to fall

from 2.8% to 2.6% year over year," said Chris Diaz, co-head of

fixed income at Brown Advisory in Chicago.

The Fed will be able to cut rates more than the market

expected, he said. "There's going to be enough downward pressure

in the shelter component and wages that will continue to put

downward pressure on inflation."

Following the PPI data, U.S. rate futures priced in 31

basis points (bps) of easing this year, compared with 27 bps

late on Wednesday, according to LSEG calculations. The next rate

reduction is expected either at the October or December meeting.

The benchmark 10-year yield slid 8.9 bps to 4.544%

after hitting a roughly three-week high on

Wednesday. U.S. 30-year yields also fell, down 7.6 bps at 4.758%

.

The two-year yield, which reflects Fed policy moves, was

down 4.8 bps at 4.317%. On Wednesday, the yield rose

to its highest since mid-January of 4.389%.

The PPI report followed data on Wednesday that showed

the Consumer Price Index rose at an annual rate of 3.0% in

January, up from 2.9% in December and above forecasts for a rise

of 2.9% year-on-year.

Energy, food and shelter prices all contributed to the

increase. The core rate, which excludes food and energy, also

rose more than expected.

The U.S. Treasury, meanwhile, is set to auction $25

billion in 30-year bonds on Thursday. Analysts said the bond

looks fairly valued and would require a major concession or

sell-off for the auction to be absorbed successfully.

In other parts of the bond market, the U.S. two-year

breakeven inflation rate rose to 3.338%, the

highest since the summer of 2022, before easing to around 3.16%

and well above the Fed's 2% target for consumer inflation.

The rate is derived by subtracting the inflation-linked

two-year Treasury yield from that of the nominal two-year note

.

U.S. President Donald Trump is on the verge of announcing

another round of tariffs, which many believe will contribute to

a sustained rise in inflation, as the price of imports

increases.