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TREASURIES-U.S. yields edge lower after high reading of core PCE index

By Herbert Lash NEW YORK, Sept 30 (Reuters) - Yields on U.S. Treasuries moved lower on Friday after a reading of core inflation rose more than expected, suggesting the Federal Reserve will continue to aggressively raise interest rates to tame high consumer prices. The personal consumption expenditures price index rose 0.3% last month after dipping 0.1% in July. In the 12 months through August, the PCE price index increased 6.2%, down from 6.4% the previous month, the Commerce Department said. But excluding volatile food and energy, the PCE price index jumped 0.6% last month after being unchanged in July and the so-called core PCE price index climbed 4.9% on a year-on-year basis in August after increasing 4.7% in July. "Both headline and core were pretty bad," said Stan Shipley, fixed income strategist at Evercore SI in New York. "Today's number was somewhat discouraging as the core reading was relatively high month to month. The revisions put it even higher for the last two years here." The two-year Treasury yield, which typically moves in step with rate expectations, initially edged up after the reading but later fell 0.5 basis point to 4.165%. The gap between two- and 10-year yields, a recession harbinger, eased back a bit to -46.9 basis points. Shipley said the reading wasn't enough for the Fed to alter its rate-hiking campaign, though he said by winter core inflation will have eased. The Fed has lifted U.S. borrowing costs faster this year than any time since the 1980s. "It's not positive for the Fed step back," he said. "The Fed is going to barge ahead." Fed Vice Chair Lael Brainard said on Friday the U.S. central bank will need to maintain higher rates for some time and must guard against lowering them prematurely. "Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely," she said in prepared remarks for a conference in New York. The Fed raised its median forecast for core PCE inflation to 4.5% this year from its previous estimate of 4.3% in June. Its estimate for core inflation in 2023 was boosted to 3.1% from the previously projected 2.7% in June. The yield on 10-year Treasury notes fell 4.7 basis points to 3.700%, and the 30-year yield lost 3 basis points to 3.663%. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.127%. The 10-year TIPS breakeven rate was last at 2.102%, indicating the market sees inflation averaging about 2.1% a year for the next decade. The rate has declined from more than 2.6% it showed five weeks ago. The U.S. dollar five years forward inflation-linked swap, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.141%. Sept. 30 Friday 9:55 AM New York / 1355 GMT Price Current Net Yield % Change (bps) Three-month bills 3.245 3.3161 0.002 Six-month bills 3.8175 3.945 0.030 Two-year note 100-41/256 4.1652 -0.005 Three-year note 98-38/256 4.173 -0.015 Five-year note 100-204/256 3.9475 -0.032 Seven-year note 100-52/256 3.8416 -0.041 10-year note 92-52/256 3.7001 -0.047 20-year bond 91-212/256 3.9735 -0.026 30-year bond 88 3.6641 -0.029 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap spread 28.75 0.25 U.S. 3-year dollar swap spread 7.50 0.75 U.S. 5-year dollar swap spread 5.50 1.00 U.S. 10-year dollar swap spread 4.75 0.50 U.S. 30-year dollar swap spread -42.00 0.50 (Reporting by Herbert Lash; editing by Jonathan Oatis)