Reuters
US Treasuries strangely subdued despite soft data
Thursday July 15, 9:59 am ET
By Wayne Cole
NEW YORK, July 15 (Reuters) - Treasury debt prices were subdued on Thursday with the market struggling to rally despite soft readings on U.S. inflation and industrial output.
Two-way trade left the 10-year note (US10YT=RR) hovering at 4.49 percent, with speculative sellers still trying to break a chart barrier at 4.50/4.51 percent. Yields on the two-year note (US2YT=RR) edged up to 2.61 percent from 2.59 percent, slightly flattening the yield curve.
"The market was relieved that the headline core PPI wasn't any worse," said Cary Leahey, senior U.S. economist at Deutsche Bank securities.
Overall producer prices fell 0.3 percent in June when analysts had looked for a 0.2 percent gain. Stripping out food and energy, the core measure rose 0.2 percent just as expected,
"But the intermediate reading was pretty bad. There's still a lot of inflation in the pipeline. There were not a lot of surprises in the data. The market is a lot more interested in the CPI figures tomorrow," he added.
Core prices at the intermediate stage of production, such as manufactured materials, rose 5.8 percent on the year, the fastest pace since 1995.
Such pipeline pressures have contributed to the rapid acceleration of consumer price inflation this year, though Fed officials argue that this is a transitory phenomenon. The June CPI report is due on Friday and expectations are the core measure will rise 0.2 percent, taking annual inflation to around 1.9 percent from 1.7 percent in May.
Investors are nervous since if CPI were to surprise on the upside, it could tempt the Federal Reserve into hiking interest rates faster and farther than currently estimated.
That uncertainty has been keeping Treasuries locked in a very tight range this week. Early Thursday, the five-year note was (US5YT=RR) 1/32 easier in price, nudging yields up to 3.69 percent from 3.68 percent late Wednesday. The 30-year bond (US30YT=RR) hovered around 5.22 percent.
Traders reported talk that a large options position was being taken by a mortgage-manager and hedged by buying 10-year notes, providing some support.
Bond bulls were also aided by a 0.3 percent drop in June industrial output, when analysts had looked for a flat outcome. Capacity utilization dropped to 77.2 percent from 77.6 percent, suggesting there was still plenty of slack in the industrial sector.
The data added to evidence that the second quarter ended on a soft note, though early signs on July have been more mixed.
The New York Federal Reserve's index of business conditions climbed to 36.5 in July from 29.9 in June, though the report is considered of only secondary importance by most analysts.
Also out were initial jobless claims showing a rise to 349,000, which was well in line with expectations. The series is being distorted by the timing of seasonal auto-plant closures and considered of little use right now.
Still to come on Thursday is the Philadelphia Fed's July business activity survey, a report considered important by analysts since it is one of the first readings on the month. Economists in a Reuters survey look for a pullback to 25.0 after June's rise to 28.9.
There will be the usual interest in the measures of prices and employment, both of which dipped in June.
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