Inflation Dents Treasury Prices
By Amanda Cooper
NEW YORK (Reuters) - Treasury prices moved lower on Thursday after a surprise rise in the Federal Reserve (news - web sites)'s favored gauge of inflation but yields remained range-bound as investor jitters over global tensions continued to support prices.
The Fed has often cited benign inflation as one of the reasons to keep official interest rates low.
But the Commerce Department (news - web sites)'s final figures for fourth-quarter GDP (news - web sites) showed the core personal consumption deflator was revised up to show a 1.2 percent rise from 0.7 percent, suggesting that inflationary pressures could be building, a possibility which led bond prices lower.
Yields are still close to their lowest levels in eight months, however, as investors continue to bet that neither inflation nor the jobs picture will pick up enough to warrant a rise in official rates this year.
"Taking a step back and looking at the greater scheme of things, it's about a two and a half basis point sell-off in the ten year (Treasury). We just seem to be in a very tight range," said Jon Blumenfeld, interest-rate strategist at BNP Paribas.
"There is nothing to make the market rally further in the short term without some new negative data on the economy. We already know that the Fed is not hiking, that's fully priced now," he said, adding that a build-up in short positions was also helping to keep 10-year yields within a 3.67-3.77 percent band.
The Commerce Department also reported U.S. economic growth holding at 4.1 percent as expected.
At 11:10 a.m. (1610 GMT) the benchmark 10-year Treasury note had shed 9/32 in price to yield 3.74 percent, versus 3.71 percent late on Wednesday.
Other data showed initial jobless claims rose last week to 339,000 from an upwardly revised 338,000 the week before. Analysts had looked for first-time claims to dip to 335,000.
But it was the fall in the four-week moving average to what economists said was a three-year low of 341,500 from a revised 344,500 the previous week that put Treasuries under additional pressure.
Another report from the Conference Board (news - web sites) showed the number of help-wanted ads in U.S. newspapers increased slightly in February, suggesting a slow but steady pick-up in the jobs market.
The Help-wanted index rose to 40 from an upwardly revised 39 in January, but down from 41 at this time last year.
SOME PRESSURE FROM FED
Also scheduled on Thursday are four different Fed speakers, all of whom are voting members on this year's Federal Open Market Committee (news - web sites), including chairman Alan Greenspan (news - web sites).
St Louis Fed chief William Poole said the U.S. was well placed for a long and solid expansion. He said rates must rise and it was a question of timing, depending on the vigor of the economy, which knocked Treasuries back a bit.
Five-year notes were last down 5/32, leaving yields at 2.70 percent, compared with 2.66 percent, while 30-year bonds dropped 15/32 to yield 4.69 percent, against 4.66 percent the day before.
Yields on the new two-year note were up slightly at 1.53 percent, having sold at 1.52 percent in Wednesday's $26 billion auction.
Greenspan spoke on rural economic issues and did not touch on either the U.S. economy as a whole nor monetary policy.
In a separate speech to the New York Bankers' Association, New York Fed President Timothy Geithner warned against the risks posed to the economy by the growing U.S. budget deficit and the low national savings rate.
In his first major speech since taking over at the New York Fed, Geithner said that while the economic environment looked quite favorable, with low inflation and an expectation for only modest price rises, the U.S. must strengthen risk management and the resilience of critical market infrastructure.
More interesting may be comments by Fed Governor Donald Kohn who talks on monetary policy around 12.30 p.m. (1730 GMT). Analysts see Kohn as close to Greenspan and regard anything he says as being indicative of Fed policy as a whole.
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