* Fed funds futures show 59% odds of September rate hike
* Producer Price Index report due on Thursday, CPI report out on Friday
* Treasury sees strong demand for three-year note auction
(Updated in New York afternoon time)
NEW YORK, Sept 8 (Reuters) – U.S. Treasury yields edged higher on Tuesday as traders awaited key inflation data due later this week for clues on whether the Federal Reserve is likely to raise interest rates this month.
Traders raised bets on a rate hike at the U.S. central bank’s September 15-16 meeting after the Labor Department reported on Friday that employers added far more positions than expected in August.
But this week’s producer and consumer price reports are seen as the real test, with policymakers looking for further evidence that inflation pressures are continuing to cool.
“The market’s waiting on PPI and CPI. I think that’s going to dictate next week’s Fed decision,” said Will Compernolle, macro strategist at FHN Financial.
The Labor Department is scheduled to release the Producer Price Index for August on Thursday. The Consumer Price Index for the same month is due on Friday.
Fed funds futures now show traders pricing in 59% odds of a rate hike next week.
The 2-year note yield, which typically moves in step with Fed interest rate expectations, rose 1.46 basis points to 4.394%, while the yield on benchmark 10-year notes gained 1.43 basis points to 4.798%.
The yield curve between 2- and 10-year notes flattened to 40 basis points.
Yields also increased as oil prices hit a six-week high after Iran-backed Houthis in Yemen attacked Saudi energy facilities, setting oil installations ablaze and threatening a major expansion of the six-month-old Middle East war.
The 10-year yield is trading near its highest level since October 2023 as investors position for possibly higher interest rates, a “higher-for-longer” inflation backdrop and a still-resilient economy.
“The rising yields we’ve seen so far are pretty close to fundamentals,” said Compernolle, adding that “this could just be a sign of the new normal. It’s not necessarily symptomatic of something going wrong.”
The climb, which has also pushed 30-year yields to their highest levels since 2007, has stoked concerns about demand for U.S. debt as the government’s fiscal trajectory continues to deteriorate.
The Treasury saw good demand for a $58 billion auction of three-year notes on Tuesday.
The debt sold at a high yield of 4.474%, slightly below where it traded ahead of the auction. Demand was 2.72 times the amount of debt on offer, the highest since November.
The Treasury will also sell $39 billion in 10-year notes on Wednesday and $22 billion in 30-year bonds on Thursday.
(Reporting by Karen Brettell; Editing by Paul Simao and Deepa Babington)
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