TREASURIES-U.S. Treasury yields plunge as inflation pressures moderate

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By Karen Brettell NEW YORK, Aug 10 (Reuters) - U.S. Treasury yields plunged on Wednesday and markets priced in a smaller Federal Reserve rate hike for September after data showed that inflation pressures moderated more than expected in July. U.S. consumer prices did not rise in July due to a sharp drop in the cost of gasoline, delivering the first notable sign of relief for Americans who have watched inflation climb over the past two years. The Consumer Price Index rose by an annual rate of 8.5% in July, while the core CPI, which excludes volatile food and energy costs, gained 5.9%. The sharp drop in Treasury yields indicates that traders were likely positioned for a larger inflation increase. "The downside miss is certainly not something the markets were positioned for, I think the market was really one way positioned for a higher inflation print and higher Fed pricing,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. Fed funds futures traders are now pricing in only a 38% chance that the U.S. central bank will hike rates by 75 basis points when it meets in September, compared to 68% earlier. A 50 basis point increase is seen as a 62% probability. Benchmark 10-year note yields fell as low as 2.67%, before bouncing back to 2.77%. Two-year note yields got as low as 3.08%, before rebounding to 3.15%. The yield curve between two-year and 10-year notes was at 39 basis points after earlier reaching minus 53 basis points, the deepest inversion since 2000. Yields have risen off four-month lows reached last week as investors adjust for the likelihood that the U.S. central bank will remain hawkish, rather than pivot to a slower pace of rate increases as some had expected after the Fed’s July meeting. Employment data on Friday showing that U.S. job growth unexpectedly accelerated in July, and the level of employment rose above its pre-pandemic level, boosted these hawkish expectations. Expectations for the Fed could change again, with more inflation and employment data for August due before the Fed's September 20-21 meeting. "We’ve only gotten one out of two CPI prints before then and we’ve got another payroll print as well and a full set of data effectively for August, so I think the jury’s still very much out on September," Goldberg said. August 10 Wednesday 9:09AM New York / 1309 GMT Price Current Net Yield % Change (bps) Three-month bills 2.56 2.6125 -0.020 Six-month bills 2.97 3.0572 -0.089 Two-year note 99-182/256 3.1522 -0.134 Three-year note 100-18/256 3.1003 -0.116 Five-year note 99-90/256 2.8909 -0.089 Seven-year note 98-174/256 2.835 -0.064 10-year note 100-236/256 2.7663 -0.031 20-year bond 99-232/256 3.2562 0.012 30-year bond 97-16/256 3.0253 0.020 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 28.25 3.00 spread U.S. 3-year dollar swap 9.50 1.50 spread U.S. 5-year dollar swap 3.00 0.50 spread U.S. 10-year dollar swap 4.75 0.00 spread U.S. 30-year dollar swap -30.25 -0.25 spread (Editing by Emelia Sithole-Matarise and Jane Merriman)