TREASURIES-US yields rise amid market consolidation before Fed meeting

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 5 (Reuters) - U.S. Treasury yields were modestly higher on Friday in generally rangebound trading, with investors consolidating positions ahead of an expected interest rate cut from the Federal Reserve next week.

Inflation as measured by the Personal Consumption Expenditures (PCE) Price Index came in line with expectations, while U.S. consumer sentiment improved in December. The reports did not change expectations for the upcoming monetary easing by the Fed.

In late morning trading, the benchmark 10-year yield rose 1.7 basis points (bps) to 4.125% US10YT=RR, while 30-year bond yields drifted higher, up 2.4 bps at 4.788% US30YT=RR.

On the shorter end of the curve, U.S. two-year yields, which reflect interest rate expectations, were up 2.1 bps at 3.552% US2YT=RR.

The Federal Open Market Committee, which sets monetary policy, is expected to end its two-day gathering next week by announcing it will lower the benchmark overnight rate by 25 basis points to a range of 3.50%–3.75%, with the central bank easing for a third straight meeting.

"We are in a holding pattern, especially in terms of near-term rate expectations...and we have been quite rangebound since August," said Dhiraj Narula, U.S. rates strategist, at HSBC in New York.

"That comes from a lot of uncertainty about the backdrop and especially recently with the Fed's blackout window, so there's been no commentary from FOMC members. We might see some near-term positioning shift based on global factors, but in general, it is very much a holding pattern."

Data showed that the PCE price index increased 0.3% in September after gaining 0.3% in August. In the 12 months through September, the PCE Price Index advanced 2.8% after rising 2.7% in August.

Excluding the volatile food and energy components, the PCE price index gained 0.2% in line with August's 0.2% gain. In the 12 months through September, the so-called core inflation increased 2.8% after rising 2.9% in August.

The Fed tracks the PCE price measure for its 2% inflation target.

"With the Fed meeting next week the big debate is whether they can cut rates to support the job market with inflation above their target and this morning's PCE numbers show that inflation is stable," wrote Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management in Charlotte, North Carolina, in emailed comments after the data.

He added that the Fed will be able to cut interest rates by 25 basis points, "although there will likely be some discussion – and potential dissent – about inflation remaining sticky and not approaching the 2.0% target any time soon."

The University of Michigan's Surveys of Consumers said its Consumer Sentiment Index increased to 53.3 this month from a final reading of 51.0 in November. Economists polled by Reuters had forecast the index rising to 52.

In other corners of the bond market, the yield curve, which reflects monetary policy expectations, was little changed on Friday, with the spread between U.S. two-year and 10-year yields at 57.2 bps US2US10=TWEB.

This just reflects a temporary reversal of the steepening trend seen in the last few days. Overall, the trend is for the curve to steepen in 2026 as the Fed continues to embark on its easing cycle even as inflation worries continue to percolate.