TREASURIES-U.S. yields climb after weak bond auction, inflation pickup

 (New throughout, updates yields and market activity, adds
auction news, analyst comments)
    By Kate Duguid
    NEW YORK, July 11 (Reuters) - U.S. Treasury yields rose,
with the biggest gains in long-dated maturities, after
Thursday's auction of $16 billion 30-year bonds met weak demand
and U.S. underlying consumer prices recorded their biggest gain
in 1-1/2 years.
    Indirect bidders, including foreign central banks, took the
smallest percentage of a 30-year offering since February 2015.
The 30-year yield jumped to a session high following
the sale and was last up 7.1 basis points to 2.642%.

    Analysts attributed the weak demand to the high price of the
maturity going into the sale. Earlier, the bond shrugged off the
U.S. Labor Department report that its consumer price index
excluding the volatile food and energy components in June posted
the largest increase since January 2018.
    Inflation has consistently undershot the Fed's target. The
central bank has cited that as a risk as it weighs cutting
interest rates in July for the first time since 2015. The market
still expects an interest rate cut at the end of July.  
    "The Fed has left itself two paths to a rate cut. One is
inflation-shortfall-based and that is fading with this morning's
CPI data. The other is insurance-based," said Guy LeBas, chief
fixed income strategist at Janney Montgomery Scott.  
    "It seems policymakers are more focused on an insurance rate
cut - insurance against future growth shortfall."
    That explains the market's muted reaction. The two-year
yield, a proxy for market expectations of changes in
rate policy, rose modestly, last up 2.8 basis points to 1.854%.
The benchmark 10-year was last up 6.3 basis points
to 2.124%. 
    "From the Fed's perspective, I don't think it really
mattered. It doesn't really matter what numbers that come in
between now and July 31 - something dramatic would have to
happen. A slight uptick in core CPI isn't going to do the
trick," said Kevin Flanagan, head of fixed income strategy at
    The chance of a 50-basis point cut fell on Thursday to 20.4%
from 29.2% on Wednesday, according to CME Group's FedWatch tool.
A 25-point cut has been fully priced in by the market, and was
not altered by the inflation report. 
    Thursday, July 11, at 1509 EDT (1909 GMT):
 US T BONDS SEP/d              153-15/32    -38/32    
 10YR TNotes SE/d              126-252/256  -15/32    
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             2.11         2.1507    -0.039
 Six-month bills               2.0275       2.0825    0.010
 Two-year note                 99-143/256   1.8544    0.028
 Three-year note               99-192/256   1.836     0.038
 Five-year note                99-100/256   1.879     0.050
 Seven-year note               99-64/256    1.9908    0.058
 10-year note                  102-56/256   2.1238    0.063
 30-year bond                  104-192/256  2.6438    0.073
         YIELD CURVE           Last (bps)   Net       
 10-year vs 2-year yield       26.80        3.80      
 30-year vs 5-year yield       76.20        1.55      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         4.00         0.00    
 U.S. 3-year dollar swap         1.25         0.25    
 U.S. 5-year dollar swap        -0.75         0.75    
 U.S. 10-year dollar swap       -5.25         0.25    
 U.S. 30-year dollar swap      -33.00        -0.75    
 (Reporting by Kate Duguid; Editing by David Gregorio)

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