Yields were lower on 2-year and 10-year US Treasuries on Wednesday after expectations decreased for a Federal Reserve interest rate hike in October after data showed that US inflation increased less than expected in August.
But trading was choppy after the Commerce Department's Bureau of Economic Analysis said that the Personal Consumption Expenditures Price Index rose 0.3% last month after a downwardly revised 0.1% gain in July. Core PCE inflation increased 3.0% year-on-year in August after a downwardly revised 3.0% advance in July. Underlying inflation was first estimated to have risen 3.3% in the 12 months through July.
The market was pricing in a roughly 65% chance that the Fed will keep rates steady next month compared with a 55% chance before the PCE release, according to the latest data from LSEG.
While short-dated bond yields held declines incurred after the data, the benchmark 10-year yields quickly returned to levels seen before the release after initially losing ground.
"Core PCE came in lower than the consensus expectation but the market already knew that the changes in how the number was calculated were going to impact the number," said Luis Alvarado, co-head of global fixed income strategy at Wells Fargo Investment Institute.
"The actual inflation experience and the pain in affordability that consumers and businesses are feeling is still alive and well. This one data point does not change the trend that we have been experiencing. The Fed is still behind the curve and needs to act further to rein in inflation."
The yield on benchmark U.S. 10-year notes fell 1.45 basis points to 5.241%, after briefly rising to 5.2574%.
The 30-year bond yield rose 1.06 basis points to 5.6046% and was on track to advance for its seventh day in a row.
The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, fell 5.19 basis points to 4.837% after touching a low of 4.8267% after the data release.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 40.1 basis points after steepening to its highest level since September 10.
After the data, Alvarado said that investors will likely be closely watching public comments from central bank officials including Federal Reserve Bank of Minneapolis President Neel Kashkari.
On Tuesday, expectations for an October hike were reduced and short-dated yields fell after comments from New York Fed President John Williams suggested less urgency for more tightening.
Elsewhere in Wednesday's crop of economic data, the latest private payrolls data from ADP, showed that US employment increased by 90,000 jobs in September compared with consensus expectations for 70,000.
And the US trade deficit in goods widened sharply in August amid a surge in imports, suggesting that trade could remain a drag on economic growth in the third quarter.
