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Benchmark yields at their highest since November

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Traders trim 2024 rate cut expectations to below two

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Investors demand premium to absorb Treasury 10-year

auction

(Updates prices, adds investor quote, context, auction results,

graphic)

By Davide Barbuscia

NEW YORK, April 10 (Reuters) - U.S. Treasury yields

spiked on Wednesday after inflation data came in higher than

expected, lifting the benchmark 10-year yield to

above 4.5%, its highest level since November last year.

U.S. consumer prices increased more than expected in March

amid rises in the costs of gasoline and shelter, casting further

doubt on whether the Federal Reserve will start cutting interest

rates in June.

"We have already seen indications that the market was

backing off of any expectation the Fed was going to cut in the

first half of the year ... now our expectations should be that

maybe we get a cut, maybe we get nothing," said Chris Maxey,

managing director and chief market strategist at Wealthspire

Advisors.

"I wouldn't be surprised if we start to see some

conversation ... around the possibility that they're going to

raise rates later this year," he said.

The consumer price index rose 0.4% last month after

advancing by the same margin in February, the Labor Department's

Bureau of Labor Statistics (BLS) said on Wednesday. In the 12

months through March, the CPI increased 3.5%.

Economists polled by Reuters had forecast the CPI gaining

0.3% on the month and advancing 3.4% on a year-on-year basis.

"Inflation is now fully embedded ... This is going to be a

long uphill fight, we're not talking months or quarters, we're

talking years," said Dean Smith, chief strategist and portfolio

manager at FolioBeyond, referring to the Fed's battle against

rising price pressures.

Late on Wednesday, traders were betting on a first cut in

September and on less than two cuts this year, below the three

2024 cuts Fed policymakers had projected in March.

Benchmark 10-year yields surged 18 basis points day on

day to 4.55%. Two-year yields, which more closely

reflect monetary policy expectations, spiked by about 20 basis

points and were last seen at 4.96%, also their highest level

since November.

Two and 10-year yields posted their biggest daily gains

since March 2023 and September 2022, respectively.

Further out in the curve, 30-year yields gained about 13

basis points to nearly 4.63%.

U.S. President Joe Biden said on Wednesday that despite

hotter-than-anticipated inflation he predicted a cut would still

happen in 2024. Meanwhile, minutes of the U.S. central bank's

March 19-20 meeting showed Fed officials worried last month that

progress on inflation might have stalled.

For Mona Mahajan, senior investment strategist at Edward

Jones, while hotter than expected inflation complicates the path

to lower rates, the long-term story remains one of a cooling

economy.

"The direction of travel for the Fed wasn't just this year,

it was two to three years of great moderation. Whether or not we

start this year or next year, it remains to be seen," she said.

She expected higher Treasury yields to make duration - or

the idea of buying bonds because of expectations of interest

rate cuts - attractive again.

"We think over time the Fed will bring rates to a less

restrictive and more neutral stance ... so the duration play

comes back into play here for investors who maybe had missed the

first opportunity," she said, referring to late last year when

benchmark yields touched 5%.

However, in a first test of investor interest for

Treasuries, a $39 billion auction of 10-year notes tailed on

Wednesday, as the Treasury issued the paper at a high yield of

4.56%, some three basis points above the expected rate at the

time of the bid deadline, a sign that investors demanded a

premium to absorb the debt sale.

The bid-to-cover ratio, a measure of demand, was 2.34 times,

the lowest since December 2022.