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US PCE inflation edges higher in November

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US consumer spending rises last month, though less than

expected

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US 10-year yields on track for largest daily fall in four

weeks

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US yield curve flattens after PCE data

(Adds new comment, bullets, yield curve, graphic, 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 benchmark 10-year yield slid 8.2 basis points (bps) to

4.488%, on pace for the largest daily gain in

roughly four weeks.

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, fell 3.4 bps to

4.285%.

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.

U.S. consumer spending, however, rose in November. Consumer

spending, which accounts for more than two-thirds of U.S.

economic activity, grew 0.4% last month after a downwardly

revised 0.3% gain in October.

"Even with the somewhat favorable core PCE data, the

year-over-year number is still 2.8%," said Angelo Manolatos,

market strategist, at Wells Fargo in North Carolina. "We think

the Fed will remain cautious on rates and inflation at least

over the next couple of prints n 2025."

The University of Michigan's consumer sentiment survey for

December released on Friday showed that the 12-month inflation

outlook was lower than expected at 2.8%, but higher than the

2.6% posted in November.

Following the PCE data, U.S. rate futures have priced in 44

bps of rate easing, or close to two cuts of 25 bps next eyar,

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 March meeting with

a 54% 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 21.1 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.

"November inflation was more benign than expected but the

stickiness of some categories supports the Fed's hesitancy to

materially lower rates next year," wrote Jeffrey Roach, chief

economist at LPL Financial, in emailed comments.

"The economy continues to grow from strong consumer demand

as income growth and the wealth effect from higher portfolio

values give consumers capacity to spend."

In other maturities, U.S. 30-year yields were down 5.6 bps

at 4.686%.