NEW YORK: US Treasuries prices fell on Tuesday after consumer prices recorded their largest increase in more than a year, which may give the Federal Reserve more confidence in adopting a hawkish tone when it meets this week.
The Labor Department said on Tuesday its consumer price index increased 0.4 percent last month, with food prices posting their biggest rise since August 2011.
Low inflation has posed a problem for the Fed's ability to raise interest rates as economic growth continues. A rise in inflation is likely to be seen as giving the US central bank more policy flexibility, even though the main inflation gauge watched by the Fed continues to run below its 2 percent target.
"The market was trading like it was going to be more benign, it's a little bit more volatile going into tomorrow's meeting," said Sean Murphy, a Treasuries trader at Societe Generale in New York.
Investors are focused on the Fed's monetary policy statement on Wednesday, when the US central bank is expected to announce it will continue paring its bond purchase program.
The timetable for when each member of the Federal Open Market Committee expects policy to begin tightening, and how quickly, will be keenly scrutinized, as will any comments about interest rate hikes or slack in the economy from Fed Chair Janet Yellen, who is due to speak after the statement from the meeting is released.
Investors have been more wary of central banks becoming more hawkish since Bank of England Governor Mark Carney surprised markets last Thursday by saying Britain could become the first major economy to tighten monetary policy since the 2008 financial crisis.
"It was a much stronger print than the market was expecting and many are thinking that that may lead to a more hawkish tone tomorrow," said Michael Pond, head of global inflation-linked research at Barclays in New York.
"The Fed was patient with low inflation because they thought it was influenced by transient factors, and the recent data proves they are right. They are abating," Pond said.
Benchmark 10-year notes fell 13/32 in price to yield 2.65 percent, up from 2.60 percent late on Monday. Thirty-year bonds dropped 24/32 in price to yield 3.44 percent, up from 3.40 percent.
Two-year note yields, which are highly sensitive to Fed policy, also rose, to 0.48 percent, the highest since April 4.
The Fed is also seen as likely to reduce its growth estimates, however, which could boost bond prices and provoke new covering of short positions if the central bank is seen as holding rates at record lows for longer.
The Fed bought $1.03 billion in bonds due 2036 to 2044 on Tuesday as part of its ongoing purchases.
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