TREASURIES-US yields decline after data, Middle East tension spurs caution

By Chuck Mikolajczak

NEW YORK, Jan 14 (Reuters) - U.S. Treasury yields dipped on Wednesday after readings on the health of the consumer and inflation, while investors awaited a ruling from the Supreme Court on the legality of President Donald Trump's tariffs and geopolitical tensions flared in the Middle East.

The Commerce Department said retail sales rose 0.6% in November, topping expectations of economists polled by Reuters who called for a 0.4% increase, after a downwardly revised 0.1% drop in October.

Separately, the Labor Department said the Producer Price Index for final demand rose 0.2% in November, matching the estimate of economists polled by Reuters, after edging up 0.1% in October.

Both reports were delayed due to last year's 43-day government shutdown.

"The economic data, on one hand, is a little bit dated, on the other hand, at the margin, it might have been the PPI services number was pretty soft, so it may have been helpful," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin.

"On the other hand, what's supporting the bond market here is a lot of geopolitical tension going on, a little bit of consolidation in the equity market, so it can put a short-term bid in the Treasuries, which is what we're seeing, but at the end of the day I don't think the Treasury market has a lot of direction at the moment."

The United States is withdrawing some personnel from bases in the Middle East, a U.S. official said on Wednesday, after a senior Iranian official said Tehran had warned neighbors it would hit American bases if Washington strikes, as Iran's leadership tries to douse the worst domestic unrest the Islamic Republic has faced.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB fell 3.3 basis points to 4.138%.

The yield on the 30-year bond US30YT=TWEB declined 3.4 basis points to 4.794%.

Markets continue to wait on the Supreme Court to issue a ruling on Trump's sweeping tariffs, as the Court issued three decisions but has yet to decide on the global levies.

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 63.4 basis points.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Federal Reserve, lost 1.6 basis points to 3.512%.

Markets have largely ruled out any chance of a rate cut at the Federal Reserve's meeting later this month, pricing in only a 5% chance, while expectations for a cut of at least 25 basis points at the central bank's March meeting are at 27.2%, according to CME's FedWatch Tool, roughly even with the 27.1% odds in the prior session.

The New York Times reported that Minneapolis Federal Reserve President Neel Kashkari did not want to cut interest rates last month and sees no need to cut them any time soon given labor market resilience and inflation above the Fed's target.

Separately, Kashkari also said in a virtual event that he is optimistic about the economic outlook and expects inflation to ease, but it is unclear where it will be by the end of the year.

Atlanta Federal Reserve President Raphael Bostic said the challenge of containing inflation had not yet been won, which means the Fed still needs to be restrictive in its policy.

On the other end of the spectrum, Federal Reserve Governor Stephen Miran said the Trump administration's deregulation effort will put downward pressure on inflation and is another reason for the U.S. central bank to cut interest rates.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.371%, its highest since mid-November, after closing at 2.367% on Tuesday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.298%, indicating the market sees inflation averaging about 2.3% a year for the next decade.