Treasury yields waver as U.S. inflation data cools, jobs report looms

Treasury yields wavered as traders weighed lighter-than-expected U.S. inflation data for August as they awaited the September jobs report due later in the week.

The 2-year Treasury note yield was last little changed at 4.895%, while the 10-year Treasury yield was more than 4 basis points higher at 5.298%, recovering after a brief pullback earlier in the session. The benchmark yield traded near 2007 highs. The 30-year Treasury bond was up nearly 4 basis points at 5.632%, or around its highest level since 2002.

One basis point equals 0.01%, and yields and prices move in opposite directions.

Consumer prices were reported Wednesday to have posted a smaller-than-expected increase in August compared to the same period a year ago, according to the Federal Reserve's primary measure of inflation.

The personal consumption expenditures price index increased a seasonally adjusted 0.3% last month, putting the 12-month gain at 3.4%, the Commerce Department reported Wednesday. Economists surveyed by Dow Jones had been looking for increases of 0.3% and 3.7% respectively.

'Adjusting their sails'

"Net, net, the inflation fire is not burning as hot as markets expected in August, and bond yields are adjusting their sails as investors rethink exactly how many Fed rate hikes might be needed to keep inflation moving back down to target," Christopher Rupkey, chief economist at FWDBONDS, wrote in response to the latest release.

Excluding food and energy, PCE posted a 0.2% increase in August that put the annual core level at 3%. The respective forecasts were for 0.3% and 3.3%.

Though the Fed officially follows the headline PCE number, officials generally consider the core reading a better gauge of longer-term inflation trends.

The good news on inflation Wednesday came after recent commentary from Federal Reserve officials led to a repricing of monetary policy expectations. At one point this month, traders priced in a more than 80% chance of a quarter-point rate hike in October. Those odds sat around 37% after Wednesday's release, with traders pushing the next expected increase to December, according to the CME Group's FedWatch tool.

Yields initially moved lower on the data, though they turned back higher as traders began looking ahead to the September U.S. jobs report, due Friday at 8:30 a.m. ET. Economists expect the economy added 84,000 jobs this month.

If Friday's numbers come in hotter than expected — as did Wednesday's ADP private payrolls report — it could send yields higher.

— With additional reporting by CNBC's Jeff Cox