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TREASURIES-Prices rise after data shows muted core inflation

Friday, 12 Oct 2012 | 12:32 AM ET

* U.S. core producer prices unchanged in September

* Worries persist over whether Spain will request aid

* Fed buys $1.89 billion in long-dated bonds

* Bonds pare gains after unexpectedly strong consumer data

(Updates to midday, adds comment)

By Richard Leong

NEW YORK, Oct 12 (Reuters) - U.S. Treasuries prices rose on Friday, with benchmark yields on track to fall for a fourth straight session after U.S. producer price data signaled underlying inflation remains muted due to sluggish demand.

Worries on whether Spain will ask for a full-blown bailout to help its struggling economy stoked safety bids for Treasuries, while the Federal Reserve's latest bond purchase added to gains in longer-dated debt, analysts said.

A downturn in U.S. stocks helped propel Treasuries prices to session highs, with the Standard & Poor's 500 index

falling 0.37 percent.

The government said its Producer Price Index rose 1.1 percent in September, largely due to a 9.8 percent jump in gasoline prices. However, bond traders focused on the index's core rate, which excludes volatile energy and food prices and was unchanged from August.

The muted core PPI reading made it more attractive to own Treasuries and other fixed-income securities since rising inflation erodes bond values.

The inflation trend is "pretty well contained so that's helped the bond market," said Brian Rehling, senior fixed income strategist with Wells Fargo Advisors in St. Louis, Missouri.

Benchmark 10-year Treasury notes

rose 9/32 in price, yielding 1.637 percent, 3 basis points lower than Thursday's close.

The 30-year bond

was up 28/32 in price, erasing an earlier 18/32 decline in overseas trading. The 30-year yield was last 2.804 percent, down from Thursday's close at 2.848 percent.

Since the Fed embarked on its third round of large-scale bond purchases, dubbed QE3, a month ago with the goal to bolster the economy, the 10-year yield has fallen nearly 25 basis points and the 30-year yield about 30 basis points.

Trading of longer-dated issues was choppy on light volume as bond dealers and investors adjusted their portfolios to make room for the this week's $66 billion in coupon-bearing supply.

Longer-dated prices briefly retreated from highs after a private report showed consumer optimism improved to its strongest level in five years, reducing anxiety about a U.S. economic slowdown.

Spain on Friday said a European bond-buying plan was fully ready for use and that there was absolutely no political resistance from within the euro zone to a Spanish bailout request.

U.S. households felt better about the economy and their own finances, according to the Thomson Reuters/University of Michigan's preliminary October reading on consumer sentiment. The index rose to 83.1, up from 78.3 the month before, marking the highest level since September 2007.

Some economists attributed upbeat news on housing partly to the improvement in consumers' mood. If this continues, it could bode favorably for stocks and risky assets and cause some investors to scale back holdings in Treasuries, investors said.

"I'm getting more positive about housing, which had been negative on the economy," said Wilmer Stith, who help manages the $300 million Wilmington Broad Market Bond Fund in Baltimore

.

On the supply front, the Federal bought $1.889 billion in Treasuries due in February 2036 to August 2042 under its Operation Twist. The program involves selling shorter-dated Treasuries and buying longer-dated issues to try to hold down mortgage rates and other long-term borrowing costs to stimulate the economy.

(Reporting by Richard Leong; Editing by Kenneth Barry)

((richard.leong@thomsonreuters.com)(+1 646 303 6313)(Reuters Messaging: richard.leong.thomsonreuters.com@thomsonreuters.net))

((-------MARKET SNAPSHOT AT 12:02 p.m. EDT (1602 GMT)------- Dec T-Bond 150-02/32 (+26/32) Dec 10-Year note 133-15/32 (+07/32) Change vs Current Nyk yield Three-month bills 0.1025 (+0.00) 0.104 Six-month bills 0.15 (+0.00) 0.152 Two-year note 99-31/32 (+) 0.262 Five-year note 99-28/32 (+01/32) 0.651 10-year note 99-28/32 (+08/32) 1.641 30-year bond 98-28/32 (+26/32) 2.807 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 11.00 (-1.00) U.S. 3-year dollar swap spread 10.75 (-0.25) U.S. 5-year dollar swap spread 13.50 (+0.75) U.S. 10-year dollar swap spread 5.50 (+1.25)

U.S. 30-year dollar swap spread -22.50 (+1.00)))

Keywords: MARKETS USA BONDS/

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