Treasuries-US yields drop as tame July inflation data cools rate hike bets

The Consumer Price Index (CPI) edged up 0.1% in July, data showed, after declining 0.4% in June, which was the first monthly drop in six years. Annual inflation slowed to 3.4% in July from 3.5% in June.

Stripping out the volatile food and energy components, the CPI rose 0.2% last month after being unchanged in June. The so-called core CPI increased 2.5% year-on-year in July, down from 2.6% in June.

Following the data, U.S. rate futures priced in on Wednesday a 44% chance of a rate increase at the September Fed meeting, down from 48% late on Tuesday. Traders also expected just 27 bps of tightening after the CPI report, down from nearly 30 bps on Tuesday.

"Slowly but surely the disinflationary path continues, with a third straight encouraging core CPI print," said Christopher Hodge, chief U.S. economist at Natixis in New York.

"All Fed meetings in the near future will need to price in the possibility of a surprise, but we continue to think that the Fed will be able to narrowly avoid a hike amid a slow and gradual drift down towards target inflation, a cooling consumer sector, and a more precarious jobs outlook."

U.S. Treasury yields declined on Wednesday after data showed a modest increase in consumer prices in July that largely matched expectations, easing concerns about inflation and diminishing the likelihood of a Federal Reserve interest rate hike next month.

In early morning trading, U.S. two-year yields, which are sensitive to the outlook for interest rate moves, fell 4.6 basis points (bps) to 4.172% US2YT=RR. The benchmark 10-year yield slid 2.8 bps to 4.656% US10YT=RR.