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Bonds Slip as Economic Signs Point to Possible Rate Hike

Reuters
Thursday, 17 Jul 2008 | 1:15 PM ET

U.S. Treasurys prices fell Thursday as news that housing starts jumped in June and jobless claims rose less than expected in the latest week boosted prospects for a Federal Reserve rate hike by year-end.

Treasury debt prices briefly pared losses after a weaker-than-expected reading of regional manufacturing activity from the Philadelphia Federal Reserve, but the report was not weak enough to spur a real bid for Treasurys.

"The economic releases (on housing starts and jobless claims) were the biggest factor," said John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, N.J.

Early stock market gains on forecast-beating earnings byJPMorgan Chasealso weighed on Treasurys, but even when stocks gave up some gains Treasurys prices did not improve.

"Treasurys have had trouble finding a bid after the strong housing starts report, even though much of it was just related to building code changes in New York City," Canavan said.

The government reported that home building projects started in June rose 9.1 percentand that new jobless claims rose less than expected last week.

The jump in housing starts, however, was inflated by July 1 changes in New York City building codes that caused builders to start projects and file permits in June before the changes went into effect. The government said that without that somewhat artificial surge, housing starts would have fallen 4 percent.

"Treasurys are stuck at weaker levels and keeping an eye on equities," said Canavan.

Inflation fears also kept the Treasury market on offer, said John Spinello, chief fixed-income technical strategist at Jefferies & Co in New York.

On Wednesday, the government said U.S. inflation accelerated in June to its fastest rate since the aftermath of Hurricane Katrina in 2005.

"Bonds will remain vulnerable to any sense of inflation being embedded in the outlook," Spinello said. "The tone has changed. Inflation is going to be the ongoing theme for some time."

Shortly before midday, benchmark 10-year Treasury notes were down 11/32 in price, while their yields, which move inversely to prices, rose to 3.98 percent from 3.94 percent late Wednesday.

Two-year notes fell 3/32, their yields rising to 2.48 percent from 2.43 percent Wednesday.

Five-year Treasury notes fell 9/32 in price, their yields rising to 3.26 percent from 3.20 percent Wednesday.

Thirty-year bonds slipped 7/32 in price, their yields rising to 4.60 percent from 4.59 percent on Wednesday.

U.S. short-term interest rate futures pushed up the implied chances of late-year interest rate increases from the Fed to 96 percent from 88 percent late on Wednesday. The Fed is still expected to leave benchmark rates steady in August.

Overnight, the TED spread -- the difference between 3-month dollar Libor and 3-month T-bill yields -- widened further to 145 basis points, a level not seen since late April.

U.S. Treasurys prices fell as news that U.S. housing starts jumped in June and jobless claims rose less than expected in the latest week boosted prospects for a Federal Reserve rate hike by year-end.

A stronger stock market also drew investment dollars away from safe-haven Treasurys, traders said.

U.S. stocks rose at the open after JPMorgan Chaseand two other Dow components posted quarterly results that eased fears a weak economy and the credit crisis would stifle corporate profits.

News that home building projects started in June rose 9.1 percentand that new jobless claims rose less than expected in the latest week prompted some selling of Treasurys.

The jump in housing starts, however, was inflated by July 1 changes in New York City building codes that caused builders to start projects and file permits in June before the changes went into effect. The government said that without that somewhat artificial surge, housing starts would have fallen 4 percent.

June housing starts rose 9.1 percent from May to a 1.066 million unit annual rate, well above the consensus forecast.

Benchmark 10-year Treasury notes fell 9/32 in price, while their yields, which move inversely to prices, rising to 3.98 percent from 3.94 percent late Wednesday.

"Jobless claims rose, but not dramatically, after a big decline a week earlier. They still suggest a weak economy, but not dramatic job cuts," said Gary Thayer, senior economist at Wachovia Securities in St. Louis.

U.S. short-term interest rate futures pushed up the implied chances of late-year interest rate increases from the Fed to 96 percent from 88 percent late on Wednesday. The Fed is still expected to leave benchmark rates steady in August.

Aside from the housing and jobless data, however, inflation fears kept the Treasury market on offer, said John Spinello, chief fixed-income technical strategist at Jefferies & Co in New York.

On Wednesday, the government said U.S. inflation accelerated in June to its fastest rate since the aftermath of Hurricane Katrina in 2005.

"Bonds will remain vulnerable to any sense of inflation being embedded in the outlook," he said. "The tone has changed. Inflation is going to be the ongoing theme for some time."

Two-year notes fell 4/32, their yields rising to 2.49 percent from 2.43 percent Wednesday.

Five-year Treasury notes fell 9/32 in price, their yields rising to 3.26 percent from 3.20 percent Wednesday.

Thirty-year bonds slipped 4/32 in price, their yields rising to 4.60 percent from 4.59 percent on Wednesday.

Overnight, the TED spread--the difference between 3-month dollar Libor and 3-month T-bill yields -- widened further to 145 basis points, a level not seen since late April.

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