Recasts, adds new comment, breakeven inflation, updates yields

By Gertrude Chavez-Dreyfuss

NEW YORK, July 15 (Reuters) - U.S. Treasury yields rose on Tuesday, with 30-year yields hitting five-week highs, after data showed inflation in the world's largest economy increased in June, suggesting the Federal Reserve will likely remain cautious in resuming cutting interest rates this year.

The benchmark 10-year yield gained 5.2 basis points (bps) to 4.479% US10YT=RR, compared with 4.413% before the data, rising for four straight days. It earlier hit a high of 4.487%, its strongest level since June 11.

The 30-year yield hit a five-week peak of 5.022% US30YT=RR. The 5% yield was a key technical level and when that was hit, it opened further selling in 30-year bonds, analysts said.

U.S. two-year yields, which track interest rate expectations, also increased on the day, touching 3.961%, the highest since June 20. They were last up 5.9 bps at 3.957% US2YT=RR.

Tuesday's data showed the Consumer Price Index $(CPI.UK)$ increased 0.3% last month after edging up 0.1% in May. June's gain was the largest gain since January. In the 12 months through June, the CPI climbed 2.7% after rising 2.4% in May.

Economists polled by Reuters had forecast that the CPI would climb 0.3% and increase 2.6% on a year-over-year basis.

Excluding the volatile food and energy components, the CPI rose 0.2% in June after edging up 0.1% in the prior month. In the 12 months through June, core CPI inflation increased 2.9% after rising 2.8% for three straight months.

"Fed Chairman (Jerome) Powell, has been pretty adamant about a couple things, including the fact that inflation is coming. It might not have shown up materially in this report," said Jim Barnes, director of fixed income at Bryn Maw Trust in Berwyn, Pennsylvania.

"But you know, he had stated it's coming and that they have to get through this summer in order to see where the higher prices -- what part of the product chain -- are going to come in. Until then, I think until you get these couple months behind you, and you actually see what the future holds, you'll get more clarity as to what the rate cut situation is going to be for this year."

Fed funds futures, which are tied to monetary policy have priced in about 49 bps of easing by the end of the year, or about two 25 bps of rate cuts each, according to LSEG estimates.

Traders also factored in that the Fed would likely cut rates in September with a 60% probability.

Kay Haigh, global co-head of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management, in emailed comments after the data, said the CPI data showed some early signs of the tariff impact, but overall, underlying inflation remained muted.

"For the time being, the Fed remains in wait-and-see mode. Should underlying inflation, however, continue to prove benign the path remains open to a resumption of the Fed's easing cycle in the autumn," Haigh noted.

In other parts of the bond market, U.S. breakeven inflation, which represents the difference between the yield on nominal Treasuries and the yield on Treasury Inflation-Protected Securities $(TIPS)$ of the same maturity, rose across the board.

It reflects the market's expected average inflation rate over the period until the securities mature.

Data showed that the U.S. five-year breakeven inflation hit 2.501% USBEI5Y=RR on Tuesday following the CPI data, the highest since late March, while 10-year breakevens climbed to 2.411% USBEI10Y=RR, the highest since February.

Near-term breakevens such as those in the one-year and two-year sector, also gained, hitting multi-week peaks.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama, Franklin Paul and Susan Fenton)

((gertrude.chavez@thomsonreuters.com; 646-301-4124))