By Sam Goldfarb 

U.S. government bonds pulled back sharply Thursday, pushing yields to their highest levels in four weeks, after new data showed consumer prices rose more than expected in June.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.122%, the highest close since June 12, compared with 2.061% Wednesday.

Yields, which rise when bond prices fall, climbed after the Labor Department said the closely watched consumer-price index rose 0.1% in June from the prior month, while core prices rose 0.3%. Both readings were above the estimates of economists surveyed by The Wall Street Journal. Yields then took another step higher after a $16 billion auction of 30-year Treasury bonds attracted soft demand from investors.

Investors tend to sell Treasurys in response to strong inflation data because inflation erodes the purchasing power of bonds' fixed payments.

Investors and analysts were particularly interested in Thursday's inflation report because it came a day after Federal Reserve Chairman Jerome Powell strongly signaled that the central bank is ready to cut interest rates later this month, partly in an effort to boost inflation.

Federal-funds futures, which investors use to bet on the direction of interest rates, suggested the chances that the Fed could cut the federal-funds rate by 0.50 percentage point -- rather than just 0.25 percentage point -- at its next meeting jumped to 29% after Mr. Powell's comments on Wednesday from 3% a day earlier, according to CME Group data. The likelihood edged down to 21% Thursday after the inflation report.

"A good CPI print is not enough to take a cut off the table," said Blake Gwinn, a rates strategist at NatWest Markets. Still, the odds of a 0.50 percentage point cut have declined "as we've gotten a couple of strong data prints."

The CPI report also pushed the 10-year break-even rate -- a market-based measure of annual inflation expectations over the next decade based on the extra yield investors demand to hold regular 10-year Treasurys over 10-year Treasury inflation-protected securities -- to 1.77% early Thursday, according to Tradeweb. That was up from 1.75% Wednesday and a recent low of 1.62% on June 17.

Signs that the Fed will attempt to preserve the economic expansion by cutting interest rates have provided a big boost to corporate bonds in recent weeks.

The average extra yield, or spread, that investors demand to hold U.S. investment-grade corporate bonds over Treasurys settled Wednesday at 1.13 percentage points, according to Bloomberg Barclays data. That was down from a recent peak of 1.30 percentage points on June 3 and near the 2019 low of 1.09 percentage points set in April.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

July 11, 2019 16:07 ET (20:07 GMT)