By Sunny Oh

Economists surveyed by MarketWatch were forecasting an 0.2% increase in core CPI, which strips out volatile food and energy prices

Treasury yields retraced their fall on Tuesday as an coming inflation report added to fears that the Federal Reserve could accelerate the pace of monetary tightening.

What are Treasurys doing?

The 2-year note yield, sensitive to shifting expectations for Fed policy, was up 2.9 basis points to 2.106%, according to Tradeweb data.

The 10-year Treasury note yield was mostly unchanged at 2.853%, after plumbing an intraday low of 2.822%. While, the 30-year bond rate was flat at 3.136%.

Bond prices move inversely to yields.

See: 10-year Treasury yield eases after hitting multiyear high (http://www.marketwatch.com/story/10-year-treasury-yield-eases-after-hitting-multiyear-high-2018-02-13)

What's driving markets?

Bonds are struggling for direction ahead of the consumer-price index reading on Wednesday. The concern is a higher-than-expected inflation report could catch the bond market off-guard as it gives the Fed a stronger case for delivering on its three or four rate increases this year. Economists surveyed by MarketWatch were forecasting an 0.2% increase in core CPI, which strips out volatile food and energy prices.

The NFIB small business sentiment index (http://www.marketwatch.com/story/small-business-sentiment-throttles-higher-as-plans-to-expand-hit-record-high-nfib-says-2018-02-13)rose two points to 106.9 in January, the second best reading in the wake of the 2007-2009 recession. The wage component of the report rose 5 points to 31%, the highest since 2000.

President Donald Trump's budget proposal released on Monday is expected to add to existing deficits. Though his budget is unlikely to be passed in its current form, its priorities suggest the White House was willing to ramp up spending to juice the economy.

Higher budget deficits could drive up the government's borrowing costs if investors need extra yield to compensate for the risk of holding Treasurys. Analysts at Credit Suisse estimated after the recent spending bill, debt servicing costs could eventually exceed 5% of GDP. Increased issuance can also overwhelm investors when the price-insensitive Federal Reserve no longer serves as a backstop for the bond market.

Read: Trump's budget forecasts a doubling of deficits (http://www.marketwatch.com/story/trumps-budget-forecasts-a-doubling-of-deficits-2018-02-12)

What did market participants say?

"I'm not going to add another bottom line to what the NFIB said but just to highlight the inflationary pressures that are clearly building in the midst of the optimism. This along with exploding budget deficits, a weak U.S. dollar, quantitative tightening and less quantitative easing overseas are of course the catalysts for the rise in interest rates that has infected the stock market," said Peter Boockvar, chief market analyst for the Bleakley Advisory Group.

What else is on investors' radar?

Investors are also keeping tabs on how the Fed intends to respond to fiscal stimulus when the U.S. economy is at full capacity and unemployment is at multidecade lows.

Cleveland Fed President Loretta Mester said she supported the same number of rate increases passed last year again in 2018 (http://www.marketwatch.com/story/feds-mester-economy-will-work-through-this-episode-of-market-turbulence-2018-02-13), but recent tax cuts and the fiscal spending measures could alter that estimate.

New Fed Chairman Jerome Powell said the central bank will "remain alert" to any risks (http://www.marketwatch.com/story/powell-says-fed-will-remain-alert-to-any-financial-stability-risks-2018-02-13) to financial stability, marking his maiden attempt to soothe financial markets.

(END) Dow Jones Newswires

February 13, 2018 11:20 ET (16:20 GMT)