Long-dated US Treasuries buoyed by inflation hope
By Wayne Cole
NEW YORK, Jan 19 (Reuters) - Longer-dated Treasuries remained in demand on Wednesday as investors bet U.S. inflation would stay restrained, though strength in jobs and housing data took a toll on shorter-term debt.
Market optimism on inflation was encouraged by a 0.1 percent drop in the headline consumer price index for December. The core measure excluding food and energy rose 0.2 percent, as expected, while annual growth held at 2.2 percent.
More surprising was a huge 48,000 drop in jobless claims to 319,000, suggesting the recent rise in this series was mainly due to seasonal adjustment problems. Housing starts also showed a hefty 10.9 percent bounce for December.
The resilience in housing and jobs added to expectations the Federal Reserve would keep raising interest rates for the next few meetings and pressured short-term debt.
Two-year notes <US2YT=RR> dropped 1/32 in price, lifting yields to 3.25 percent from 3.23 percent late Tuesday. Yields on five-year notes <US5YT=RR> rose to 3.72 percent from 3.71 percent.
In contrast, longer-term debt benefited from hopes the Fed's commitment to tighter policy now, would contain inflation in the future. Such hopes seemed to be shared by Fed Governor Ben Bernanke, who on Wednesday said inflation was likely to remain under control.
Bernanke also conceded that the U.S. economy looked to have grown more slowly last quarter than the Fed expected.
All of which helped lift the benchmark 10-year note <US10YT=RR> 5/32 in price, lowering yields to 4.17 percent from 4.19 percent. As a result the spread between two- and 10-year yields narrowed to 92 basis points, having shrunk over 30 basis points in less than a month.
"The data overall is consistent with the economy ticking along with a relatively stable labor market performance, with a housing market that remains solid and inflation that looks contained," concluded Alan Ruskin, research director at 4CAST.
"The data is if anything is a mild negative for bonds, but in the current environment will not dissuade traders from their main pursuit - curve flattening," he added.
Curve flattening trades involve borrowing at short-term rates and buying longer-term debt, and they have been all the rage in recent weeks and months.
This trend has seen 30-year bond yields dive 30 basis points in just three weeks, even out-performing the more liquid 10-year note. On Wednesday morning, the 30-year bond <US30YT=RR> had firmed 18/32 in price, taking yields down to 4.65 percent from 4.68 percent on Tuesday.
Still to come on Wednesday is a speech by Fed Bank of New York President Timothy Geithner at around 12:45 p.m. (1745 GMT).
The Fed also releases its Beige Book summary of economic conditions, prepared for the two-day policy meeting on Feb 1 and 2. ((Reporting by Wayne Cole; editing by Ted d'Afflisio; Reuters Messaging:
[email protected]; phone 646-223-6278))
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-------------- MARKET SNAPSHOT AT 9:35 a.m. (1435 GMT) --------------------
March Eurodollar <EDH5> 97.03 (+0.00)
March T-Bond <USH5> 114-04/32 (+07/32)
March 10-year note <TYH5> 111-30/32 (+01/32)
Change vs Current
Nyk yield
Three-month bills<US3MT=RR> 2.35 (+0.05) 2.397
Six-month bills <US6MT=RR> 2.63 (+0.02) 2.697
Two-year note <US2YT=RR> 99-17/32 (-01/32) 3.254
Five-year note <US5YT=RR> 99-18/32 (-01/32) 3.722
10-year note <US10YT=RR> 100-17/32 (+03/32) 4.183
30-year bond <US30YT=RR> 110-21/32 (+12/32) 4.664