US treasury yields edge higher as market awaits next week's inflation data

US treasury yields rise: US Treasury yields saw a slight increase on Friday, lacking catalysts to dictate direction as traders awaited key inflation data for April next week to shape expectations of Federal Reserve policy adjustments.

Yields had reached one-month lows last week following a softer-than-expected April employment report, reigniting speculation that the Federal Reserve could implement two 25 basis point interest rate cuts this year.

Now, traders are eagerly anticipating further insights into inflation dynamics, with hopes that upcoming data will solidify expectations of potential rate cuts.

Tom di Galoma, Managing Director and Co-head of Global Rates Trading at BTIG, noted that further declines in inflation could prompt discussions around rate cuts.

Last week, the Federal Reserve hinted at a potential future reduction in borrowing costs, acknowledging recent disappointing inflation readings but suggesting that rate cuts may still be some time away.

The core Consumer Price Index (CPI) report scheduled for Wednesday is expected to reveal a 0.3 per cent rise in April, translating to an annual increase of 3.6 per cent, according to economists surveyed by Reuters.

Will Compernolle, a macro strategist at FHN Financial, views the outcome of the inflation report as asymmetric, suggesting that poor results could prompt significant considerations by the Fed regarding current policy stance.

Looking ahead, other significant US data releases next week include producer prices for April on Tuesday and retail sales for April on Wednesday.

As of the latest update, benchmark 10-year note yields were up by 4 basis points, while two-year yields rose by 3 basis points. The yield curve inversion between two-year and 10-year notes narrowed by one basis point to minus 35 basis points.

(With Reuters inputs)