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Core PCE seen lower after PPI data

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US rate futures price in 33 bps in cuts in 2025

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US two-year breakeven inflation rises to highest since

2022

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US 30-year bond auction shows poor results

(Adds new comment, US 30-year bond auction results; updates

prices)

By Gertrude Chavez-Dreyfuss

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

on Thursday after certain components in the Producer Price Index

(PPI) for January pointed to lower inflation, suggesting that

the Federal Reserve remained on track to cut interest rates

later this year.

U.S. President Donald Trump's broad announcement on Thursday

to impose reciprocal tariffs on every country with duties on

U.S. imports elicited little reaction in a Treasuries market

weary of being bombarded daily with tariff headlines.

The tariffs will be imposed within weeks as Trump's

trade and economic team studies bilateral tariff and trade

relationships, a White House official said.

The focus this week has been on inflation, with both

consumer and producer price indexes coming in higher than

expected, though the details were not as bad as people thought.

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 physicians' offices 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.

"Those components embedded in the PPI bode well for PCE

later this month so that's why we're getting this rally," said

Vinny Bleau, director, fixed income capital markets, at Raymond

James in Memphis.

Following the PPI data, U.S. rate futures priced in 33 basis

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

Wednesday, according to LSEG calculations. The next rate

reduction is expected either at the October or December meeting.

Chris Diaz, co-head of fixed income at Brown Advisory in

Chicago, said he believes the Fed will be able to cut rates more

than the market had expected. "There's going to be enough

downward pressure in the shelter component and wages that will

continue to put downward pressure on inflation."

The benchmark 10-year yield slid 10.1 bps to 4.533%

after hitting a roughly three-week high on

Wednesday. Thursday's fall was the largest in one day since

mid-January. U.S. 30-year yields also eased, down 9.4 bps to

4.741%, the biggest one-day decline in more than a

week.

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

down 5.4 bps at 4.311%, its largest daily drop since

late January. On Wednesday, the two-year yield rose to its

highest since mid-January of 4.389%.

SEASONALITY IN JANUARY CPI

The PPI report followed data on Wednesday that showed that

CPI 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.

The core rate, which excludes food and energy, also rose more

than expected.

"The CPI components ... have some seasonality to it," said

Raymond James' Bleau, noting that prices are typically higher

at the beginning of the calendar year, but should slow down in

the second half. "Car insurance, shelter, things like eggs are a

bloated right now, so hopefully those would simmer down."

Weak demand at the Treasury's $25 billion auction of

30-year bonds on Thursday confirmed fixed-income investors'

caution about longer-dated debt.

The bond was priced at

4.748%

, more than 1 bp above the expected bid at the rate

deadline, as investors demanded a higher yield to take on U.S.

long-duration risk. There were $58.2 billion in bids for a 2.33

bid-to-cover ratio, a demand metric, which was the lowest since

August.

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 3.17%,

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

.

The yield curve was less steep on Thursday, with the spread

between two-year and 10-year yields at 22 bps,

compared with 26.6 bps late Wednesday.

"I am hesitant to put anything into any single-day move,

but am certainly surprised at how well the 10-year has done

today given the weak auction yesterday," said Brown Advisory's

Diaz. "The back-up in yields may have brought in some buyers."