TREASURIES-US yields rise on higher-than-expected producer price inflation

By Karen Brettell

Aug 14 (Reuters) - U.S. Treasury yields rose on Thursday after data showed that producer prices increased more than expected in July, reducing the odds that the Federal Reserve may cut rates by more than 25 basis points in September.

Fed funds futures traders are pricing in a near certainty that the U.S. central bank will make a 25-basis-point cut next month as the labor market slows. Relatively benign consumer price inflation for July has added to this view.

In recent days traders had also begun to speculate that a larger cut may be on the table if the jobs data for August is weak, though the producer price data released on Thursday makes this scenario less likely.

"It tempers some of those expectations or thoughts of the Fed potentially moving in a larger than 25-basis-point increment as their first move," said Angelo Manolatos, macro strategist at Wells Fargo in Charlotte.

"With PCE (Personal Consumption Expenditures) likely coming in on a core basis about 0.3% at the end of this month, the Fed can still very well cut 25 basis points in September. But there's still a lot of data between now and then."

The Producer Price Index for final demand jumped 0.9% last month after being unchanged in June, the Labor Department's Bureau of Labor Statistics said on Thursday. Economists polled by Reuters had forecast the PPI would rise 0.2%.

Other data showed that the number of Americans filing new applications for jobless benefits fell last week amid low layoffs, but a reluctance by businesses to boost hiring because of softening domestic demand could drive the unemployment rate to 4.3% in August.

The 2-year Treasury note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, was last up 5.4 basis points on the day at 3.741%. It reached 3.655%, the lowest level since May 1, before the data.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 5.3 basis points to 4.293%.

The yield curve between two-year and 10-year notes US2US10=TWEB was little changed on the day at 55.2 basis points.

Treasury Secretary Scott Bessent on Thursday said conditions now appear more favorable for a rate cut, and that the Fed could "start with 25 (basis points) and then accelerate."

Bessent said on Wednesday that "there's a very good chance," of a 50-basis-point cut at the U.S. central bank's September 16-17 policy meeting.

San Francisco Fed President Mary Daly pushed back against the need for a 50-basis-point cut, saying that "I'm worried it would send off an urgency signal that I don't feel about the strength of the labor market."

St.Louis Fed president Alberto Musalem also said that a half-point rate cut at the Fed's September meeting is not warranted by the current state of the economy, with the country near full employment, inflation running above the Fed's 2% target and businesses still in the early stage of adapting to higher import taxes.

Bank of America, meanwhile, notes that benchmark 10-year yields may see further declines after posting a so-called "death cross," in which the 50-day moving average moved below the 200-day moving average.

"The signal implies a yield downtrend may persist in the coming months and the choppy / tactical yield ranges seen this year may be prone to breaking lower," Paul Ciana, technical strategist at the bank said in a report on Thursday.

Ciana sees the 10-year yields heading towards 4.10% to 4.05% as long as they hold below 4.4%.

The Treasury Department said on Thursday it will sell $16 billion in 20-year bonds next week and $8 billion in 30-year Treasury Inflation-Protected Securities (TIPS).