U.S. bonds edged lower on Wednesday after minutes from the Federal Reserve's January meeting showed officials were nearing a decision how to adjust a promise to keep interest rates low for a while to come.
At the meeting, the Fed ultimately decided to make a second modest cut to its bond-buying program, which now runs at $65 billion per month. It made the move despite turmoil at the time in emerging markets brought on in part by the withdrawal of Fed stimulus.
Earlier, U.S. housing starts recorded their biggest drop in almost three years, raising concerns about the housing recovery, and on safety buying as bonds of emerging market countries including Ukraine dropped on rising civil unrest.
Housing starts in January were likely weighed down by harsh weather, but the third month of declines in permits pointed to some underlying weakness in the housing market. Permits to build homes fell 5.4 percent in January, the largest drop in since June.
Ukraine's sovereign bonds and currency tumbled on Wednesday as a renewed wave of violence hit the capital Kiev, adding pressure on Russia's rouble which has hit an all-time low against the euro.
"There was a relatively weak housing starts print this morning as well as lower than expected building permits. We also had a risk-off tone going into the data this morning with overnight stocks down and emerging markets also once again seemingly under pressure," said Michael Pond, head of global inflation-linked research at Barclays in New York.
U.S. producer prices also rose for a second straight month in January, pushed up by an increase in the cost of goods, but there was little sign of a broad pick-up in inflation pressures at the factory gate. Tepid inflation may complicate the Federal Reserve's strategy in the intermediate term as it pares its bond purchase program and moves closer to raising interest rates from record low levels.
"Inflation is not an issue with regards to tapering but we think it will be a more important issue in the year ahead, given that they have made significant progress in employment but very little progress on the inflation side of their mandate, where inflation has moved away from their target over the last year," said Pond.
The Labor Department said on Wednesday its seasonally adjusted producer price index for final demand increased 0.2 percent last month, the largest increase since October. It was the first release since the expansion of the index to include services and construction.
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