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U.S. Treasury yields rose on Tuesday after the

release of the latest consumer price index data, reflecting market expectations

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of tighter monetary policy from the Federal Reserve.

Headline prices increased 0.5% month-over-month in January, after gaining

0.1% in December, the Labor Department said on Tuesday. Core prices, meanwhile,

rose 0.4% month-over-month.

Both readings fell in line with expectations of economists polled by

Reuters.

The Fed will need to keep gradually raising interest rates to beat

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inflation, two U.S. central bank officials said on Tuesday, as they put

investors on notice that borrowing costs may ultimately need to go higher than

is now widely expected.

“Inflation is normalizing but it’s coming down slowly,” Richmond Fed

President Thomas Barkin said on Tuesday. “I just think there’s gonna be a lot

more inertia, a lot more persistence to inflation than maybe we’d all want.”

Traders of interest rate futures now see the Fed raising borrowing costs

three more times, bringing the policy rate to the 5.25%-5.50% range by July and

above the 5.1% by December that policymakers previously projected.

“The idea that there would be significant disinflation and a subsequent need

to pull back on tightening rate policy has unwound,” said Tim Schwarz, portfolio

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manager at Ninety One.

“In the end, it was pretty much a sideways print, but certainly one that

corroborates the path of higher rates deeper into the year,” he said.

Benchmark 10-year note yields rose to 3.760%, their highest

since Jan. 3, reflecting market expectations that the Fed keeps interest rates

higher for longer.

Two-year yields rose to 4.624%, their highest since early

November. The two-year is particularly sensitive to rate movement expectations.

“My quick take on this is that the number in my view is higher than what the

market expected,” said Tom di Galoma, managing director and co-head of rates

trading at BTIG.

“Disinflation is kind of changed here,” he said. “This gives some ammunition

to the Fed to basically come out with more hawkish rhetoric.”

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The yield curve between two-year and 10-year notes inverted

further to minus 86.3 basis points on Tuesday, after inverting as far as minus

88 basis points last week.

Prior to the CPI report, the Fed’s Senior Loan Officer Survey on Monday

indicated tightening credit conditions, as the latest quarter’s results showed

banks continuing to tighten their lending standards despite tighter spreads.

The next major data point will come Wednesday after the release of January

retail sales volume. This is expected to show retail sales rebounding 1.6% in

January after falling 1.1% in December, according to a Reuters survey of

economists.

Later this month, on Feb. 24, the Commerce Department will release personal

consumption expenditure and income data.

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The Treasury Department will sell $36 billion in 17-week bills on Wednesday,

following weaker than expected demand for last week’s auctions. On Thursday, it

will also sell $75 billion in four-week bills and $60 billion in eight-week

bills.

February 14, Tuesday 2:37PM New York / 1937 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.665 4.7869 0.009

Six-month bills 4.8325 5.0223 -0.003

Two-year note 99-19/256 4.6239 0.090

Three-year note 99-28/256 4.3197 0.099

Five-year note 97-190/256 4.0063 0.080

Seven-year note 97-146/256 3.9019 0.064

10-year note 97-216/256 3.7607 0.042

20-year bond 100-208/256 3.94 0.018

30-year bond 96-224/256 3.8005 0.008

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap spread 33.00 4.25

U.S. 3-year dollar swap spread 20.25 3.25

U.S. 5-year dollar swap spread 6.50 1.25

U.S. 10-year dollar swap spread -1.00 0.75

U.S. 30-year dollar swap spread -39.25 -0.75

(Reporting by Matt Tracy; Editing by Chizu Nomiyama)