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US PCE inflation edges higher in November

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US 10-year yields post largest daily fall in four weeks

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US yield curve flattens after PCE data

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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

partial government shutdown, after more than three dozen

Republicans rejected 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 monthly inflation slowed 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

bolstered the case

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

"we're pretty restrictive"

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 2.8%, 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%.