US PCE inflation edges higher in November
US 10-year yields post largest daily fall in four weeks
US yield curve flattens after PCE data
Fed officials justify slower pace of rate cuts in 2025
Adds new comments, Fed officials' remarks, updates prices
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 20 (Reuters) - U.S. Treasury yields slid on Friday after data showed inflation in the world's largest economy moderately cooled last month, backing the Federal Reserve's interest rate cut of a quarter of a percentage point earlier this week and bolstering expectations of two more rate reductions next year.
Treasuries also drew safe-haven bids ahead of a possible , after more than three dozen Republicans a demand by President-elect Donald Trump to use the measure to lift the nation's debt ceiling.
"The market underestimated the Fed and then accordingly adjusted. We came into this meeting with rates having sold off a tremendous amount," said Robert Tipp, chief investment strategist and head of global bonds, at PGIM Fixed Income in New York.
"While I don't think this changes the equation for the Fed, the PCE data is very much in line with the Fed's storyline of gradual disinflation and guarded optimism for next year."
In afternoon trading, the benchmark 10-year yield slid 5 basis points (bps) to 4.52% , to post its largest daily gain in roughly four weeks. On the week, however, the yield rose about 12 basis points and over the last two weeks, it has gained 37 bps.
On Thursday, this yield hit a 6-1/2-month high of 4.594% as the market priced in more inflation pressures under a Donald Trump administration in 2025, with tariffs and tax cuts.
On the shorter end of the curve, the two-year yield, which is more sensitive to the policy rates outlook, slipped 1.1 bps to 4.308% .
The report showed that in November after showing little improvement in recent months. The personal consumption expenditures (PCE) price index rose 0.1% last month after an unrevised 0.2% gain in October.
Michael Gregory, deputy chief economist, at BMO noted that his overall takeaway on the PCE data was that inflation remains stubborn.
"The yearly change in core PCE prices was 2.8%, smack dab in the middle of the 2.6%-to-3.0% range of the past nine months and, unrounded, it's also a seven-month high," Gregory wrote in a research note. "The 'supercore' measure is still running hot, above 3%." Supercore excludes volatile items such as food, energy, and housing from the index.
Fed officials on Friday also for reducing borrowing costs more gradually in 2025, as they assessed the impact of tariffs and other policies promised by President-elect Donald Trump.
New York Fed President John Williams, a voter on the Federal Open Market Committee, said in a separate interview with CNBC, that his baseline expectation continues to be that further rate cuts are coming. He thinks, however, that with monetary policy, meaning short-term rates are continuing to restrain the economy.
The University of Michigan's consumer sentiment survey for December released on Friday also showed that the 12-month inflation outlook was lower than expected at , but higher than the 2.6% posted in November.
Post-PCE data in the afternoon, U.S. rate futures have priced in 39 basis points of rate easing, or at least one 25-bp cut, LSEG calculations showed. Futures showed just 37 bps of rate reductions in 2025 late on Thursday.
The earliest rate cut is now seen at the May meeting with a 62% probability, LSEG data showed. On Thursday, it showed that the earliest rate move would be June, with a 65% likelihood.
In other parts of the Treasuries market, the U.S. yield curve flattened with the spread between two- and 10-year yields at 21.2 bps , compared with 24.1 bps late on Wednesday. The curve steepened to 27.6 bps on Thursday, the widest gap since June 2022.
Analysts viewed Friday's curve flattening as a healthy retreat from the current steepening trend. Yield curves tend to be steeper in an easing cycle, with the short end's rise under control.
In other maturities, U.S. 30-year yields were down 5.6 bps at 4.686% .
Inflation gauges https://reut.rs/4gpbwQB [https://reut.rs/4gpbwQB]
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci, Alex Richardson and Diane Craft)
((gertrude.chavez@thomsonreuters.com [gertrude.chavez@thomsonreuters.com]; 646-301-4124))
