Treasurys rally after tame CPI
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By Leslie Wines, MarketWatch
Last Update: 12:18 PM ET Mar 16, 2006
NEW YORK (MarketWatch) -- Treasury prices rallied at midday Thursday, sending yields lower, after a government report showed that U.S. retail-level inflation was tame last month.
The fixed-income market abhors inflation because it eats into the value of bonds and usually cheers indications of mild inflation.
The benchmark 10-year Treasury note last was up 15/32 at 98 27/32 with a yield ($TNX :
CBOE 10-Year Treasury Yield Index
Prices were drawing support from a Labor Department report that the headline consumer price index rose 0.1% in February, as lower prices for energy, food and clothing offset higher prices for medical care, shelter and air fares. See Economic Report.
The increase matched Wall Street's expectations.
The core CPI, which strips out food and oil prices, increased 0.1%, a bit lower than the 0.2% gain that economists polled by MarketWatch had expected. See Economic Calendar.
Although the bond market reacted favorably to the data, Peter Morici, a business professor at the University of Maryland, cautioned against viewing the moderation in inflation as indicating a trend.
The outlook for inflation is mixed, and Federal Reserve chief Ben Bernanke faces a challenging policy environment, Morici said.
He pointed out that although gasoline prices fell last month, they are once more on the rise.
The Labor Department also reported that initial jobless claims hit the highest level since December, rising by 5,000 to 309,000. See full story.
Separately, the Commerce Department announced that the pace of home building slowed in February, after reaching a 12-year high in January. The result still beat economists' expectations.
Housing starts fell 7.9% in February to a seasonally adjusted annual rate of 2.12 million housing starts. Read full report.
The booming housing sector has been one of the stalwarts of the economy, but there have been a number of recent indications that it may be slowing down.
However, analysts are divided as to whether the housing market is simply slowing moderately or is heading for a hard landing.
Kevin Giddis, managing director of fixed income at Morgan Keegan, cautioned against reading too much into the February housing starts report as results were heavily influenced by weather and regional factors.
Housing starts declined 24% in the Northeast, which was beset with cold weather last month, while rising 8% in the more temperate West, he pointed out.
There was scant reaction to news from the Philadelphia Fed that its latest monthly survey of manufacturing expanded for the ninth straight month in March.
The Philly Fed business activity index fell to 12.3 from 15.4 in February. Economists expected the index to fall to 13.8. Readings over zero indicate growth.
Kim Rupert, managing director of fixed income at Action Economics, noted that, despite the downward pressure on yields Thursday, the yield on the 10-year note remained not far from the multi-month high of 4.8% reached last week.
She predicted yields will stay at elevated levels ahead of the Federal Open Market Committee's policy-review meeting and decision on interest rates on March 28.
"Yields have nowhere to go but higher from here," she said.
Investors are all but certain that Fed policymakers will hike the federal funds target to 4.75% at this month's meeting, and Treasury yields have to keep pace with the expected new target, according to Rupert. End of Story
Leslie Wines is a reporter for MarketWatch in New York
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