TREASURIES -US yields mixed after inflation, consumer sentiment data

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 24 (Reuters) - U.S. Treasury yields were narrowly mixed on Friday, with those on the shorter end of the curve slightly lower, after data showed consumer prices in the world's largest economy rose less than expected in September.

The inflation report reinforced expectations that the Federal Reserve will cut interest rates at its policy meeting next week.

Longer-dated U.S. yields, on the other hand, were modestly higher after a consumer sentiment survey from the University of Michigan showed a decline in the index, but an increase in five-year inflation expectations.

Investors, however, were more focused on the U.S. Consumer Price Index (CPI), which rose 0.3% last month after climbing 0.4% in August, data showed. On a year-on-year basis, the CPI grew 3.0% after advancing 2.9% in August.

Economists polled by Reuters had forecast the CPI increasing 0.4% and rising 3.1% year-on-year.

Excluding the volatile food and energy components, the CPI gained 0.2% after rising 0.3% in August. The so-called core CPI increased 3.0% year-on-year after rising 3.1% in August.

In late morning trading, the benchmark 10-year yield turned lower after the CPI data, but was flat on the day at 3.997% US10YT=RR, while the two-year yield, which reflects interest rate expectations, dipped 1.1 bps to 3.472% US2YT=RR.

U.S. 30-year bond yields were up 1.5 bps at 4.586% US30YT=RR.

"It (CPI) was weaker than we expected, but I think a lot of signs of underlying inflation pressure are still there," said Jeremy Schwartz, senior U.S. economist at Nomura in New York.

"As long as you're in that mode where you're tolerating a little bit more inflation, this is a good report. This is going to encourage them to keep on that path of insurance cuts or normalization, depending how you view it."

The Fed is expected to reduce rates two more times this year, with a quarter-percentage-point cut baked in for the October 28-29 meeting, according to LSEG calculations using rate futures. For 2026, the Fed funds futures market has priced in about three more 25-bps cuts.

The yield curve, meanwhile, steepened in the wake of the CPI data, with the spread between U.S. two-year and 10-year yields at 52.2 bps US2US10=TWEB, from 50.8 bps late on Thursday. It was a pullback from the flattening trend seen in the last few days.

The curve hit 48 bps immediately after the inflation number, the flattest since September 12.