TREASURIES-US yields edge higher after data with Middle East in focus

By Chuck Mikolajczak

NEW YORK, April 9 (Reuters) - U.S. Treasury yields were modestly higher on the day after a flurry of economic data, as investors kept a close eye on any developments in the Middle East that could jeopardize the current truce in the Iran war.

U.S. crude CLc1 rose 8.55% to $102.42 a barrel and Brent LCOc1 jumped to $99.30, up 4.8% as doubts over a fragile two-week Middle East ceasefire raised concerns that energy flows through the crucial Strait of Hormuz will remain restricted, with shippers hesitant to resume transit.

Traffic through the Strait of Hormuz stood at well below 10% of normal volumes on Thursday despite a U.S.-Iran ceasefire as Tehran asserted its control by warning ships to keep to its territorial waters.

Israel bombed more targets in Lebanon, which Tehran says must be included in the ceasefire, putting it into further jeopardy.

High oil prices pose a risk to the inflation picture, as well as the overall economy, making it difficult for the Federal Reserve to justify any rate cuts.

"The Treasury market has fully handed the reins over to the commodity sector, the energy space. This isn't about growth or labor or whatever economic backdrop we see in the U.S.," said Thomas Urano, co-chief investment officer at Sage Advisory in Austin.

"We're going to have oil up in the 90s or hundreds, that's going to keep inflation pressure going, and that's not going to be good. That's going to make it very difficult for the new Fed chair to come in and make an argument to try and say, 'hey, we need to deliver two rate cuts'."

TREASURY YIELDS EDGE HIGHER

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 2.2 basis points to 4.313%.

Yields edged higher after Commerce Department data showed gross domestic product increased in the fourth quarter at a downwardly revised 0.5% annualized rate, from the previously reported 0.7% pace and below the 0.7% estimate of economists polled by Reuters.

The yield on the 30-year bond US30YT=TWEB rose 2.4 basis points to 4.91%.

Other data showed the personal consumption expenditures price index climbed 0.4%, matching expectations, after an unrevised 0.3% gain in January while weekly initial jobless claims rose 16,000 to a seasonally adjusted 219,000, above the 210,000 estimate.

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 51.9 basis points.

After a solid $58 billion auction of 3-year notes US3YT=RR on Tuesday, and a mediocre $39 billion auction of 10-year notes on Wednesday, sales for the week will be capped off on Thursday with $22 billion of 30-year bonds.

RATE CUT PROSPECTS DIMMING

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, eased 0.2 basis points to 3.792%.

Several Fed officials said earlier this week that the sharp rise in oil prices due to the war posed a risk to inflation, even as it slows the economy and the labor market.

Minutes from the Fed's March 17-18 meeting on Wednesday showed a growing group of policymakers felt that interest rate hikes might be needed to counter inflation that continued to exceed the central bank's 2% target.

Markets are pricing in a 23.3% chance for a rate cut of at least 25 basis points at the Fed's December meeting, according to CME's FedWatch Tool, roughly even with expectations from a week ago but down from 82.5% from a month ago.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.610% after closing at 2.598% on April 8.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.351%, indicating the market sees inflation averaging about 2.4% a year for the next decade.

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