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Treasuries gained, led by five-year securities, after a core inflation gauge rose less than expected in September, pushing traders to pare wagers on a Federal Reserve interest-rate increase this year.
Yields on five-year notes fell to the lowest in two weeks after a Labor Department report showed consumer prices excluding volatile food and energy costs rose 0.1 percent from a month earlier. A gauge of the yield curve steepened, with the gap between five- and 30-year yields near the widest since June, as shorter maturities outperformed longer-dated debt.
"CPI came out a little lower than expected on the core, which forces the curve to steepen," said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of 23 primary dealers that trade with the central bank. "The lower inflation report pushed the Fed back a little bit."
Fed Chair Janet Yellen hinted at letting U.S. growth run hot in an Oct. 14 speech to a Boston Fed conference, indicating the willingness to continue stoking price growth. Higher inflation erodes the value of longer-maturity debt. U.S. 30-year bonds have fallen 3.9 percent in October, set for their steepest decline since June 2015, according to Bank of America data.
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The U.S. five-year bond yield declined about two basis points, or 0.02 percentage point, to 1.23 percent as of 2:55 p.m. in New York, the lowest intraday level since Oct. 5, according to Bloomberg Bond Trader data. The price of the 1.125 percent security due in September 2021 was 99 15/32.
The benchmark 10-year note yield fell two basis points to 1.74 percent, while the gap between five- and 30-year debt climbed to about 1.28 percentage points.
The 10-year break-even rate, a gauge of inflation expectations that measures the difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, was about 1.68 percentage points.
Futures pricing indicates a gradual pace of Fed rate increases, with traders seeing about a 63 percent probability the central bank will tighten policy by December, down from a 66 percent chance seen a day earlier. The calculations assume that the effective fed funds rate will average 0.625 percent after the next increase. Swaps trading implies the rate will be about 0.66 percent in a year, and 0.78 percent in two years, according to data compiled by Bloomberg.
The inflation report "keeps the bond market in purgatory here, not knowing when the Fed is going to act next," said Sean Simko, who manages $8 billion at SEI Investments in Oaks, Pennsylvania. "Inflation is moving higher, but we are not near that 2 percent target yet."