TREASURIES-US yields moderately up after weak spending, soft inflation outlook data

By Gertrude Chavez-Dreyfuss

NEW YORK, June 27 (Reuters) - U.S. Treasury yields were modestly higher on Friday, coming off session peaks, after data showed consumer spending declined unexpectedly in May even as inflation remained tepid, as markets started pricing in a quicker pace of Federal Reserve easing this year.

The inflation outlook as indicated in the University of Michigan survey also fell from May levels, suggesting that the Fed could be a lot closer in resuming rate cuts than people expect.

U.S. 10-year yields were last up 3.2 basis points (bps) at 4.284% US10YT=RR, after earlier hitting a roughly two-week high. On the week, the 10-year yield was down 8.6 bps, falling for a third straight week.

U.S. 30-year yields rose 3.5 bps to 4.851% US30YT=-RR. They were down 3.7 bps for the week, also sliding for three straight weeks.

U.S. two-year yields advanced 2.9 bps to 3.744%, but down more 16.4 bps on the week. Its weekly fall was the most since mid-April.

Friday's data showed U.S. consumer spending unexpectedly fell in May, dipping 0.1% last month after an unrevised 0.2% gain in April, as the boost from the pre-emptive buying of goods like motor vehicles ahead of tariffs eased. According to Action Economics, this is the first decline in spending since September 2021.

U.S. personal income also fell 0.4% last month.

On the inflation front, the Personal Consumption Expenditures (PCE) Price Index gained 0.1% in May, matching the rise in April, data showed. In the 12 months through May, PCE inflation increased 2.3% after climbing 2.2% in April.

Underlying or core inflation, which strips out the volatile food and energy components, increased 0.2% last month. That followed a 0.1% rise in the so-called core PCE inflation in April. In the 12 months through April, core inflation advanced 2.7% after rising 2.6% in April.

Following the data, traders in rate futures on Friday added to bets the Fed will lower short-term borrowing costs by 75 basis points in 2025, most likely starting in September.

Fed funds futures priced in about 65 bps of rate cuts in 2025.

"The lead indicators for the jobs market are starting to show signs of softening, and that means the July to September period for the jobs figures are going to be critical," said James Knightley, chief economist at ING.

"If the jobs numbers do indeed disappoint, then rather than wait until the fourth quarter and cut by 50 basis points, as we're currently forecasting, the Fed would much more likely start easing at the September policy meeting and follow up with 25 basis point cuts in October and December."

The University of Michigan consumer sentiment final numbers on May consumer sentiment USUMSF=ECI was upwardly adjusted to 60.7 from its originally stated 60.5.

What's interesting was the closely-tracked inflation expectations . Respondents now expect price growth of 5.0% a year from now, lower than first estimate of 5.1%, but 1.6 percentage points less than the final May reading.

There was also a bit of risk-on tone in the market earlier in the session, with the S&P 500 and Nasdaq hitting intraday record highs on renewed artificial intelligence bets. That has led to a bit of mild selling in Treasuries that pushed yields slightly lower.

The S&P and Nasdaq, however, last traded lower on the day.

All eyes are now on the tax and spending bill in the Senate. Top U.S. Republicans confronted a huge budget hole in their sprawling tax-cut and spending bill on Friday, signaling that they could miss President Donald Trump's July 4 deadline as they rewrite dozens of elements rejected by a nonpartisan referee.

In other parts of the bond market, the yield curve steepened for a third consecutive session, with the gap between two-year and 10-year yields at 54.1 bps US2US10=TWEB. On Thursday that curve was 54.7, the steepest in a month.

The steeper curve likely reflects concerns about huge fiscal deficits as investors avoided the long end of the curve. It also suggests that the market is bracing for incoming rate cuts.