NEW YORK: Benchmark US Treasury yields rose to their highest in seven weeks as a surprise rise in domestic core inflation and strong housing starts in February raised bets the Federal Reserve would raise interest rates as soon as June.
U.S. two-year notes, which are most sensitive to rate hike expectations, surged to their highest in 10 weeks after the inflation data, hitting a key 1.0 percent level.
The U.S. consumer price index, excluding the volatile food and energy components, rose 0.3 percent, bringing its year-over-year increase to 2.3 percent which was the largest gain since May 2012.
U.S. housing starts, meanwhile, grew 5.2 percent to a seasonally adjusted annual pace of 1.18 million units, the highest level since September.
"While any chances of a Fed rate hike later today have all but evaporated, the data released this morning undoubtedly support our view that a faster-than-anticipated rise in core inflation will force the Fed to raise interest rates faster than markets expect," said Steve Murphy, U.S. economist at Capital Economics.
"We think the Fed will resume tightening in June, with the fed funds rate rising to between 1.00 percent and 1.25 percent by year-end."
Benchmark 10-year Treasury notes were last down 8/32 in price for a yield of 1.989 percent, up from 1.973 percent late on Tuesday. Yields hit a peak of 1.998 percent, the highest since late January.
The 30-year bond was last up 8/32 in price to yield 2.734 percent, up from 2.731 percent late on Tuesday.
U.S. two-year notes fell 1/32 to yield 0.996 percent. Yields rose to 1.0 percent, their highest since Jan. 8.
Ahead of the Federal Open Market Committee decision this afternoon, the rate futures market sees a 51 percent likelihood the Fed will raise rates for the first time this year in June, rising slightly from 50 percent before the release of the U.S. inflation and housing starts data, according to CME Group's FedWatch program.
A second rate increase by December is seen as having an 83 percent chance, up from 80 percent before the data.
"A delay in 'normalization' today should only be seen as a 'tactical delay', driven by a measurable erosion in financial conditions since January, and a willingness on the part of the FOMC to ensure that spillovers from the recent disruption in financial conditions remain limited," said Thierry Albert Wizman, global interest rates and currencies strategist, at Macquarie in New York.
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