*

Headline CPI lower than expected, but some goods up

sharply

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Fed still widely viewed to be cautious in cutting rates

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Analysts now focus on tax cut, budget discussion in

Congress

By Tatiana Bautzer

NEW YORK, May 13 (Reuters) - U.S. Treasury yields rose

on Tuesday as lower-than-expected April inflation data

overshadowed expectations that tariffs will fuel higher prices

in the coming months, reinforcing bets that the Federal Reserve

will take its time resuming its easing cycle.

The benchmark 10-year yield, which initially

fell after the Labor Department released its April Consumer

Price Index, was up 2.2 basis points (bps) at 4.479% in late

afternoon trading. The two-year yield, which

typically tracks the interest rate outlook, was little changed

at 4.006%.

Although the headline numbers showed limited immediate

impact from the Trump administration's sharp tariff rises

announced last month, prices of certain goods such as furniture

and audio and video products rose due to the import levies, data

showed.

The consumer price index increased 0.2% last month after

dipping 0.1% in March, the first decline since May 2020.

Economists polled by Reuters had forecast the CPI would rise

0.3%. In the 12 months through April, the CPI climbed 2.3% after

rising 2.4% in the 12 months through March.

Core CPI inflation increased 2.8% on a year-on-year basis in

April after rising 2.8% in March.

Analysts still expect inflation to pick up in the coming

months. "Some of the positive aspects that contributed to a

lower April CPI do not seem sustainable, such as the drop in

used vehicle prices," said Andy Schneider, senior U.S. economist

at BNP Paribas. In April, wholesale used vehicle prices rose,

but prices for final buyers fell.

Inflationary pressure will persist even as the U.S.-China

deal made over the weekend showed both countries want to avoid a

trade war. "Tariffs are still going to be significantly higher

than they were in January," Schneider added.

Markets estimate the Federal Reserve will not cut interest

rates until later in the year, potentially twice in 2025. The

first 25 basis points cut is expected at its September meeting,

according to CME's FedWatch tool. Schneider believes the Fed

will not be able to cut rates this year.

"The report basically indicates that the Fed needs to be

very cautious and that the stand that they have taken is

probably the right course for now," said Brian Jacobsen, chief

economist at Annex Wealth Management.

As trade war fears recede, investors are expected to focus

on budget and tax cut legislation discussions in Congress.

Public debate began on Tuesday in the U.S. House of

Representatives. Congress' bipartisan Joint Tax Committee

estimates the tax cuts would cost $3.72 trillion.

"The CPI was softer than expected, which is good news, but

markets are still cautious and looking for clarity on the

longer-term policy path," said Subadra Rajappa, head of U.S.

rates strategy at Societe Generale. Stocks got more of a boost

from the inflation report than the bond market, she noted.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between two- and 10-year notes,

seen as an indicator of economic expectations, steepened 46.9

bps, suggesting that the Fed is on track to cut interest rates

this year.

U.S. yield curves typically steepen in an easing cycle, with

the front end such as the two-year tied to Fed rate cuts.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.395% after closing at 2.35% on May 12.

The U.S. dollar 5 years forward inflation-linked swap

, seen by some as a better gauge of inflation

expectations due to possible distortions caused by the Fed's

quantitative easing, was last at 2.477%.