|
Treasuries slip flustered by inflation scare Original Source Link: (May no longer be active)
http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=6828740http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=6828740
US Treasuries slip, flustered by inflation scare
Tue Nov 16, 2004 09:42 AM ET
By Wayne Cole
NEW YORK, Nov 16 (Reuters) - Treasury debt prices took a spill on Tuesday after a very high reading on U.S. producer prices raised the risk of a more aggressive tightening path by the Federal Reserve.
Inflation is anathema to debt that pays a fixed return and Treasuries fell across the board. The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) dropped 7/32 in price, lifting yields to 4.22 percent from 4.19 percent late Monday.
Producer prices jumped 1.7 percent in October, driven by a massive rise in energy costs, when analysts had looked for only a 0.5 percent gain. Stripping out food and energy costs, prices rose a more muted 0.3 percent but that was still three times the gain expected.
The high outcome stirred concerns the October consumer price report, due on Wednesday, would also surprise on the upside. If so, it would reinforce expectations of a Fed hike in December and raise the risk of a move in February as well.
"The measured pace of rate increases will continue with a 25 basis point rate rise in December and probably beyond that as well," said Joseph LaVorgna, senior U.S. economist at Deutsche Bank Securities.
Chicago Fed President Michael Moskow said nothing to counter that view in a speech early Tuesday. Moskow said there was "certainly more ground to cover" on rates, though he did add that inflation was contained enough to allow the pace of hikes to be measured.
Investors are convinced the Fed will indeed hike at its December meeting, with fund futures showing an 88 percent chance of a move. However, after the producer price data, the fear was a high core consumer price index could mean rates will rise faster and further next year as well.
Such concerns hurt short-term debt, and the two-year note (US2YT=RR: Quote, Profile, Research) shed 2/32, taking yields to 2.91 percent from 2.88 percent late Monday. Five-year notes (US5YT=RR: Quote, Profile, Research) lost 4/32, taking yields to 3.56 percent from 3.54 percent.
The 30-year bond (US30YT=RR: Quote, Profile, Research) dipped only 5/32, leaving yields at 4.90 percent, as some investors bet long-term debt would outperform the short-end.
Such bets have seen the gap between two- and 10-year yields contract sharply in recent weeks to hit 131 basis points on Tuesday, levels not seen since the emergency rate cuts of September 2001.
Treasuries did find some support from data on capital flows into and out of the United States in September. These showed a hefty $63.4 billion inflow, including $19.2 billion worth of Treasury purchases.
The data showed that, at least back in September, foreigners were still happy to finance America's huge trade and budget deficits.
Nevertheless, investors worry how long this can go on and have taken to selling the dollar in recent weeks. This in turn has mixed implications for bonds.
On the one hand, the danger of currency losses could deter private foreign investors from buying U.S. assets.
But bond bulls are betting some central banks, particularly in Asia, will act to slow the dollar's decent through intervention and the bulk of any dollars bought will end up parked in Treasuries.
So far this year, overseas central banks have bought a net $198 billion in Treasuries, so funding around half of the U.S. government's budget deficit.
© Reuters 2004. All Rights Reserved.
|
|
