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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Fiscally Conservative who wrote (54352)	2/20/2006 10:24:19 PM
From: shades	Respond to of 110194

U.S. Notes Fall as Inflation Report May Bolster Fed's Case for Higher Rate bloomberg.com Feb. 21 (Bloomberg) -- U.S. Treasuries fell in Asia on concern a report tomorrow will show inflation accelerated last month, supporting the case for the Federal Reserve to raise interest rates at least twice more. Central bank policy makers have suggested rates need to increase to cool inflation, said Yoshitaka Majima at Merrill Lynch Investment Management. A Labor Department report on Feb. 17 showed producer prices excluding food and energy had the biggest gain in a year. Ten-year yields rose to the highest in more than three months last week as traders boosted bets the Fed will lift borrowing costs at meetings in March and May. ``The Fed is still concerned about rising inflation and it is not an encouraging sign for Treasuries,'' Majima, who oversees $4 billion of debt at Merrill Lynch, said in Tokyo. ``We are still cautious about investing in the U.S. Treasury market.'' The yield on the benchmark 10-year note rose 2 basis points, or 0.02 percentage point, to 4.55 percent as of 10:38 a.m. in Singapore, according to bond broker Cantor Fitzgerald LP. The yield reached 4.63 percent last week. The price of the 4 1/2 percent note due February 2016 fell 1/8, or $1.25 per $1,000 face amount, to 99 18/32. Treasury markets were closed yesterday for President's Day. Ten-year yields may rise to 4.8 percent in the next two-to- three months, Majima said. Fed Minutes The Fed today releases minutes of its Jan. 31 meeting, where it raised borrowing costs for the 14th consecutive time. Fed Chairman Ben S. Bernanke, in testimony to Congress last week, said the economy is expanding at a pace that may require further interest-rate increases to keep inflation in check. Policy makers boosted their target for the overnight lending rate between banks a quarter percentage point to 4.5 percent at the January gathering. In a statement released after the meeting, the Fed dropped the word ``measured'' used to describe its stance, and said ``some further policy firming may be needed.'' Interest-rate futures show traders are pricing in a 96 percent chance the Fed will raise the target rate to 4.75 percent when policy makers next meet on March 28, up from about 56 percent a month ago. The odds of another quarter-point increase at the May 10 meeting was about 65 percent, from zero percent last month. The Labor Department may say tomorrow consumer prices last month rose 0.5 percent, after a drop of 0.1 percent in December, according to the median estimate of 58 economists in a Bloomberg survey. Excluding food and energy, consumer prices probably gained 0.2 percent in January, the survey showed. Prices excluding food and energy paid by factories, farmers and other producers rose 0.4 percent in January, twice the pace expected by economists surveyed by Bloomberg. Inflation Expectations Yields on Treasury Inflation Protected Securities, or TIPS, which are intended to provide a hedge against rising consumer prices, show investors' concerns about inflation have risen. The gap in yields between Treasuries and U.S. inflation- linked debt due in 10 years was 2.51 percentage points, from 2.35 percentage points two months ago. The difference in yield represents the average rate of inflation traders expect over the life of the securities. Declines in Treasuries may be tempered as hedge-fund managers and other large speculators increased their net-long position in 10-year note futures in the week ended Feb. 14, according to U.S. Commodity Futures Trading Commission data released Feb. 17. Speculative long positions, or bets prices will rise, outnumbered short positions by 150,834 contracts on the Chicago Board of Trade. The week before, traders were net long 137,913 positions. The 10-year yield has climbed 20 basis points during the past month. ``I wouldn't quite say that yields are a stunningly attractive option at the moment, however, they are looking a little better than they have,'' said Anthony O'Brien, a fixed- income strategist in London at Barclays Capital. ``We've come quite a long way since the beginning of the year.'' To contact the reporter on this story: Shamim Adam in Singapore sadam2@bloomberg.net