U.S. yields drop after tame inflation data feeds risk-off mood



* U.S. 10-year yields post largest monthly fall since April 2020

* U.S. 5-year yields show biggest monthly drop since March 2020

* U.S. core PCE inflation rises less than expected in June

* U.S. 10-year TIPS yield hits another record low (New throughout, updates prices, market activity and comments)

By Gertrude Chavez-Dreyfuss

NEW YORK, July 30 (Reuters) - U.S. Treasury yields fell on Friday, as softer-than-expected inflation data fed the view that the Federal Reserve could delay its exit from quantitative easing, while investors also worried about the raging Delta coronavirus variant.

For July, U.S. benchmark 10-year yields have fallen 23 basis points, the largest monthly decline since April 2020. The yield on U.S. 5-year notes, which have come to reflect monetary policy expectations, has dropped nearly 19 basis points, the biggest fall since March last year.

Friday's U.S. data showed core inflation rising less than forecast in June, paring back some expectations that the Fed would reduce its asset purchases soon.

In addition, the highly contagious Delta variant has prompted the U.S. Centers for Disease Control and Prevention to reinstitute mask wearing as a precaution against possible transmission of the virus by fully vaccinated people.

The yield curve, a gauge of economic sentiment and rate move expectations, flattened to 104.41 basis points, as measured by the spread between two-year and 10-year yields US2US10=TWEB .

Data showed the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.4% in June, or 3.5% in the 12 months through June.

Economists polled by Reuters had forecast the monthly core PCE price index, the Fed's preferred inflation measure, to rise 0.6% and surge 3.7% year-on-year.

"The weaker-than-expected inflation data will probably affirm the view that the Fed is not moving toward tighter policy anytime soon," said Zachary Griffiths, macro strategist at Wells Fargo Securities in Charlotte, North Carolina.

That said, St. Louis Fed president James Bullard, who is not a voting member this year, said the Fed should start reducing its $120 billion in monthly bond purchases this fall and cut them "fairly rapidly" so the program ends in the first months of 2022.

His comments prompted little reaction from the bond market since this is not the first time Bullard had backed tighter monetary policy. "The markets are prepared for an announcement in the fall, not an actual taper," said Ellis Phifer, managing director in fixed income research at Raymond James in Memphis, Tennessee.

In afternoon trading, the U.S. 10-year Treasury yield was down at 1.238% US10YT=RR , compared with 1.269% late on Thursday.

U.S. 30-year US30YT=RR yields fell to 1.894% from Thursday's 1.916%.

The yield on 10-year Treasury Inflation-Protected Securities (TIPS) plunged to a another record low of -1.176% US10YTIP=RR, as investors priced in higher inflation going forward. Some analysts said lower real yields this month reflect concerns about slowing growth after a strong first half of the year.

But Jim Vogel, senior rates strategist, at FHN Financial said higher inflation is a better explanation.

"In 2021, negative real yields are a function of the expected path of short-term interest rates set by the Fed compared with current and forecasted inflation," Vogel said. "Bottom line: there is no way that term real yields could be anything but negative right now."

July 30 Friday 3:20PM New York / 1920 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 0.045

0.0456

0.000 Six-month bills US6MT=RR

0.0525

0.0532

0.000 Two-year note US2YT=RR

99-224/256 0.1878

-0.013 Three-year note US3YT=RR

100-22/256 0.3457

-0.024 Five-year note US5YT=RR

99-162/256 0.6999

-0.030 Seven-year note US7YT=RR

99-244/256 1.007

-0.037 10-year note US10YT=RR

103-152/256 1.2339

-0.035 20-year bond US20YT=RR

107-84/256 1.8077

-0.027 30-year bond US30YT=RR

110-240/256 1.8928

-0.023

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

7.50

0.25

spread

U.S. 3-year dollar swap

12.00

0.25

spread

U.S. 5-year dollar swap

8.75

0.00

spread

U.S. 10-year dollar swap

2.25

-0.50

spread

U.S. 30-year dollar swap

-24.50

-0.75

spread


Reporting by Gertrude Chavez-Dreyfuss; Editing by David Gregorio

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