US yields rise slightly, ending a weak quarter for bonds

By Sinéad Carew

Sept 30 (Reuters) - Longer-dated US Treasury yields rose on Wednesday, while 2-year yields were down slightly, following data showing inflation increased at a slower rate than expected in August, and bets on a Federal Reserve interest rate hike in October decreased.

In September, bond yields advanced at their fastest monthly pace in years as the ongoing Middle East war kept oil prices elevated and raised concerns about the trajectory for inflation, which has remained elevated. Benchmark 10-year yields were showing their biggest quarterly rise since 2009.

Yields on 2-year and 10-year Treasuries initially extended early declines after the Commerce Department said the Personal Consumption Expenditures Price Index rose 0.3% last month after a downwardly revised 0.1% gain in July.

The data showed that Core PCE inflation increased 3% year-on-year in August after a downwardly revised 3% advance in July, after initial estimates of a 3.3% increase in the 12 months through July.

The market was last pricing in a roughly 63% chance that the Fed will keep rates steady next month compared with a 55% chance before the PCE release, according to the latest data from LSEG.

"Core PCE came in lower than the consensus expectation but the market already knew that the changes in how the number was calculated were going to impact the number," said Luis Alvarado, co-head of global fixed income strategy at Wells Fargo Investment Institute.

"The actual inflation experience and the pain in affordability that consumers and businesses are feeling is still alive and well. This one data point does not change the trend that we have been experiencing."

The yield on benchmark US 10-year notes rose 4.05 basis points to 5.296% after earlier touching 5.3061%, highest since June 2007.

For the month, the benchmark 10-year yield rose about 53 basis points, the biggest monthly climb since September 2022. For the quarter, it rose almost 87 basis points, the largest increase since the second quarter of 2009.

The 30-year bond yield rose 4.73 basis points to 5.6413%, after earlier hitting 5.6505%, highest since June 2002.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, was flat at 4.889% after at one point falling to 4.8267%.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , seen as an indicator of economic expectations, was at a positive 40.4 basis points.

Yields on 2-year Treasuries advanced by about 54 basis points in September, the biggest monthly advance since February 2023. It was also the biggest quarterly advance for that yield since the second quarter of 2023.

Yields on 30-year bonds rose about 38 basis points for the month, the most since December 2024. For the quarter, it rose more than 73 basis points, the biggest rise since the third quarter of 2023.

On Tuesday, expectations for an October hike declined and short-dated yields fell after comments from New York Fed President John Williams suggested less urgency from the Fed for more tightening.

"The Fed is still behind the curve and needs to act further to rein in inflation," Alvarado said.

Investors are also now waiting for September's crucial nonfarm payrolls report due out on Friday, and upcoming Fed speakers including Federal Reserve Bank of Minneapolis President Neel Kashkari.

The latest private payrolls data from ADP showed that US employment increased by 90,000 jobs in September, compared with consensus expectations for 70,000.

The US trade deficit in goods widened sharply in August amid a surge in imports, suggesting that trade could remain a drag on economic growth in the third quarter.