TREASURIES-US yields decline after inflation data

By Chuck Mikolajczak

NEW YORK, Jan 13 (Reuters) - U.S. Treasury yields retreated on Tuesday, after a reading on inflation for December came in as expected and kept intact market expectations for rate cuts from the Federal Reserve this year.

The Labor Department said the Consumer Price Index (CPI) rose 0.3% last month, matching expectations of economists polled by Reuters. In the 12 months through December, the CPI advanced 2.7%, equaling November's gain and in line with expectations.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB slipped 1.2 basis points to 4.175%.

"It's more of a relief trade that indeed inflation does not appear to be accelerating and so that lingering concern about inflation being too high and what that means for a host of issues, that's a concern that persists in the minds of markets and investors," said Bill Merz, head of capital market research at U.S. Bank Wealth Management in Minneapolis.

"When we have numbers like today's that alleviate some degree of that tail risk of higher inflation, that's a constructive sign, and we're seeing the bond markets have a modest but constructive reaction to that as well."

The yield on the 30-year bond US30YT=TWEB fell 0.7 basis points to 4.833%.

Expectations for the path of Fed rate cuts were little changed after the data, with markets pricing in only a 2.8% chance of a cut at the central bank's meeting later this month, down from 4.4% in the prior session, according to CME's FedWatch Tool. Expectations for a cut of at least 25 basis points at the Fed's March meeting dipped to 25.5% from 28.7% on Monday.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 64.3 basis points.

Federal Reserve Bank of St. Louis President Alberto Musalem said the Fed is committed to returning inflation to its 2% target and Tuesday's data was encouraging for views that it will converge more towards that level this year, but there was no near-term reason to cut rates further.

Federal Reserve Bank of Richmond President Tom Barkin is scheduled to speak later in the day.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 1.7 basis points to 3.53%.

More supply will come to the market on Tuesday when an additional $22 billion in 30-year bonds will be auctioned. Auctions of $58 billion in three-year notes US3YT=RR and $39 billion in 10-year notes on Monday were seen as solid by analysts.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.367% after closing at 2.368% on Monday, its highest since mid-November.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.299%, indicating the market sees inflation averaging about 2.3% a year for the next decade.