US bonds rise on prospect of US-Iran peace deal; inflation data awaited

Going into the CPI data, U.S. rate futures priced in on Tuesday a 48% chance of a hike at the Fed's policy meeting next month, down modestly from a 52.2% probability late on Monday. Traders are also expecting just 29.7 basis points of tightening this year. Market participants are also looking to the auction of $58 billion in three-year notes later on Wednesday. U.S. 3-year yields have risen around 11 bps since the last auction and Jay Barry, head of global rates strategy at J.P. Morgan, pointed out in a research note that the sector "appears fairly valued after adjusting for the level of rates and the shape of the curve over the last three to six months." Barry noted that Wednesday's CPI release adds a layer of volatility to the front end of the curve, "which may reduce end-user demand (for the three-year note) ahead of the event." Ahead of the 3-year note auction, three-year yields declined 1.6 bps to 4.289% US3YT=RR. In other parts of the bond market, the yield curve flattened on Tuesday ahead of the CPI and PPI numbers, with the gap between 2-year and 10-year yields narrowing to 45.6 bps US2US10=TWEB, compared with 46.2 bps late Monday. Earlier in the session, the curve hit 47.6 bps, its steepest level since May 22. The curve last showed a bull flattener, a scenario in which long-term interest rates are falling a little faster than shorter-dated ones, suggesting a downtick in inflation expectations. Investors are also awaiting key inflation data -- the U.S. consumer price index (CPI) -- due out on Wednesday that could determine the path of interest rates going forward. "If you know where oil prices and CPI are going, you can tell where Treasury yields are going as well," said Stan Shipley, fixed income strategist at Evercore ISI in New York. He noted though that long-term break-even inflation is well contained, which means that the market believes that the Federal Reserve will get inflation under control. "Maybe we have some problems in the short term here over the next year, but the long term over the next 10 years is fine. So unless inflation blows out again, I don't think the 10-year is going to go through this 4.70% hurdle." Consumer prices are expected to edge up 0.1% in July after falling 0.4% in June, according to a Reuters poll. Annual CPI inflation is forecast to slow to 3.4% from 3.5% a month earlier. Core CPI, which excludes volatile food and energy prices, is projected to rise 0.2% on the month, from an unchanged reading in June, with annual core inflation seen accelerating to 2.5%, slightly down from 2.6% the previous month. Meanwhile, the headline U.S. producer price index (PPI) is expected to increase 0.2% in July after declining 0.3% in June. On an annual basis, PPI inflation is forecast to ease to 4.9% from 5.5% in June. PPI data is due on Thursday. U.S. Treasuries rallied on Tuesday following declines in the previous session, as reports of a deal between the United States and Iran to end the conflict weighed on oil prices and fueled short-covering in the bond market. In late morning trading, the benchmark 10-year yield slid 1.4 basis points (bps) to 4.684% US10YT=RR. U.S. 30-year bond yields were marginally down 1 bp at 5.233% US30YT=RR. Yields move inversely to prices. On the shorter end of the curve, the yield on 2-year notes US2YT=RR, which are sensitive to market expectations for Federal Reserve interest rate moves, slipped 1.5 bps to 4.224%. U.S. yields extended their fall after Bloomberg News reported that the United States and Iran are close to "some sort of an arrangement," citing Pakistan's defence minister, Khawaja Asif. The news initially pushed U.S. crude futures 0.7% lower to $81.58 per barrel CLc1, but they were last up 0.3% at $82.35.

US bonds rise on prospect of US-Iran peace deal; inflation data awaited

Auction and curve positioning ahead of data

Inflation data and rate expectations in focus

Treasuries rally on reports of possible US-Iran arrangement

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