By Naomi Tajitsu and Alice Atkins

(Bloomberg) -- Treasuries slipped ahead of US data expected to show a rebound in inflation pressures, which would dent speculation over Federal Reserve interest-rate cuts.

The 10-year yield rose one basis point to 4.04%, ending a three-day winning streak for Treasuries that took yields to their lowest this month on Monday. That came ahead of Producer Price Index data for September that a Bloomberg poll of economists sees climbing from the previous month.

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At the moment traders are betting on a nearly 80% possibility that the Fed will cut rates by 25 basis points on Dec. 10, though a rebound in inflation could hurt the case for further moves.

Anwiti Bahuguna, global co-chief investment officer at Northern Trust Asset Management, said the ongoing backlog of US data due to the government shutdown meant an “insurance cut” by the Fed was likely next month as it waits to gain more visibility on growth and inflation.

“We really are seeing cuts in an economy that is likely to accelerate again,” said Bahuguna in an interview with Bloomberg TV. The US administration was likely to ramp up fiscal spending next year, which could also raise pressure on Treasuries, she added.

Anwiti Bahuguna, global asset allocation chief investment officer at Northern Trust, discusses the prospects for a Federal Reserve cut in December and why she’s concerned about lower rates in a environment where inflation is still above target and the US economy is likely to accelerate. She speaks on Bloomberg Television.Source: Bloomberg

She sees a pick-up in inflation as a “significant risk” for next year and has an underweight position in US bonds, while being overweight Treasury Inflation Protected Securities.

The market will get more supply on Tuesday, with the US Treasury selling five-year notes, along with two-year notes in a reopening. Investors shied away from three- and six-month bill auctions on Monday.

Evelyne Gomez-Liechti, a strategist at Mizuho International Plc, sees investors returning to higher-risk assets following last week’s bout of risk aversion.

“With risk assets well supported and the rally seen post non-farm payrolls, the risk I see is for rates to sell off from current levels as 10-year yields get closer to that 4% level that has seen resistance both in September and October,” she said.

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