By Ellie Ismailidou, MarketWatch

But market prices in rate hike by December

Treasury prices rebounded Monday, leading yields to pull back from a two-month high reached on Friday after Federal Reserve Chairwoman Janet Yellen signaled that an interest-rate increase could come as soon as September.

On Monday, a flurry of economic data showing tepid inflation pressures and solid consumer spending came in roughly within Wall Street's expectations, leaving Treasury trading largely unaffected.

"The Treasury market is taking no direction [from] the data and in fact has bounced this morning following Friday's sharp selloff," said Ian Lyngen, an independent interest-rate strategist, in an email.

According to Lyngen, longer-dated bonds were leading the rally on a combination of month-end buying and the economic implications from the Fed's insistence on trying to tighten monetary policy by year-end.

On Monday, the market was pricing in a 30% probability for a rate increase at the September Fed meeting and an almost 60% chance for it happening in December, according to the CME Group FedWatch tool (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

Typically, when investors are bracing for a potential interest-rate hike, they move funds from short-term to long-term bonds, leading long-term yields to tumble.

The yield on the 30-year Treasury bond yield lost 5 basis points to 2.244%, while the yield on the benchmark 10-year Treasury note lost 3.6 basis points to 1.597%, according to Tradeweb. Yields rise as debt prices decline.

Meanwhile, the yield on the 2-year Treasury note , which is the most sensitive to rate-hike expectations, was hovering near its highest level since June 2, trading down less than a basis point at 0.837%, according to Tradeweb.

Monday's data offered "more evidence that can be used for either side of the rate-hike debate," said James Kochan, chief fixed-income strategist at Wells Fargo Funds Management, in a phone interview.

Americans increased spending by 0.3% in July (http://www.marketwatch.com/story/auto-sales-help-boost-consumer-spending-by-03-in-july-2016-08-29), buying more new cars and trucks and devoting more money to energy such as cooling their homes.

But inflation as measured by the PCE index was unchanged in July, the Commerce Department said. The PCE index, the Federal Reserve's preferred inflation barometer, increased 0.8% in the 12 months ended in July, a tick lower than in June, while the annual rate of core inflation was flat at 1.6% below the Fed's 2% target.

The economic growth picture looks much better, Kochan said, but inflation is still below the Fed's target. Still, Fed policy makers have recently indicated that "they're willing to be patient with regard to inflation and that they've run out of excuses to not raise rates," Kochan said.

The market will now focus on this Friday's nonfarm payroll data for August, after two months of stellar jobs gains in June and July, with analysts warning that there is a potential for further Treasury selloffs if the jobs data beat expectations.

(END) Dow Jones Newswires

August 29, 2016 09:38 ET (13:38 GMT)