TREASURIES-Yields decline as business activity cools

(Updates at 1500 EDT)

By Karen Brettell

April 23 (Reuters) – U.S. Treasury yields fell on Tuesday after data showed U.S. business activity cooled to a four-month low in April, although trading remained within a range ahead of gross domestic product and inflation data later this week became known.

Business activity cooled due to weaker demand, while inflation eased slightly even as input prices rose sharply. This suggests some possible relief is on the horizon as the Federal Reserve looks for signs that the economy is weakening enough to curb price pressures.

Inflation figures in Thursday’s GDP report and Friday’s personal consumption expenditure (PCE) report will be evaluated based on whether the market reaction to continued consumer price pressure in March was justified.

“People will be focused on the specific trajectory of inflation,” said Vail Hartman, U.S. rates strategist at BMO Capital Markets in New York.

PCE data is expected to show core prices rose 0.3% in March, for an annual gain of 2.7%.

If the data comes in as expected, bonds could rise as a result, Hartman said.

“There is greater potential to be traded if an event risk passes, and as long as it settles at consensus or lower, a relief rally is more likely to occur,” he said. “If it ends up at 0.3%, that will bring much less inflation anxiety than the core CPI did in March, so that could even indicate that the initial reaction to the core CPI was overdone.”

Yields rose to a five-month high after stronger-than-expected consumer price pressures for March, announced earlier this month, dashed hopes that higher prices in January and February were an anomaly.

The yield on 10-year notes last fell 3 basis points that day at 4.596%. They are holding below the 4.696% level reached on April 16, which if broken would be the highest level since early November. The two-year interest rate fell by 5 basis points to 4.925%. On April 11, they reached 5.012%, the highest level since mid-November.

The inversion of the yield curve between two-year and ten-year bonds has decreased by 3 basis points to minus 33 basis points.

The Treasury Department saw strong demand Tuesday for an auction of $69 billion in two-year bonds, the first sale of $183 billion in short- and medium-term offerings this week.

The notes sold at a high yield of 4.898%, almost a basis point lower than where they had been trading before the sale. The bid-to-cover ratio was 2.66 times, the highest level since December.

The Treasury Department will also sell $70 billion of five-year bonds on Wednesday and $44 billion of seven-year bonds on Thursday.

(Reporting by Karen Brettell; Editing by Christina Fincher and Marguerita Choy)