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Treasuries Slip, Inflation Fears Lurk

Treasuries Slip, Inflation Fears Lurk
Friday March 11, 10:02 am ET

NEW YORK (Reuters) - U.S. Treasuries slipped anew on Friday, in part, as a widening U.S. trade deficit hit the dollar and threatened to scare foreign investors while increasing inflationary pressure at home.

The U.S. trade deficit expanded to $58.27 billion in January, the second highest on record and well above analysts forecasts of $56.5 billion.

In the past such a deterioration often was seen as a positive by bonds bulls since it implied trade would be a bigger drag on economic growth than first thought, perhaps curbing the more optimistic calls for GDP growth above 4.0 percent this quarter.

But the deficit news also hit the dollar and bond investors have become increasingly worried lately that a sliding currency would add to inflationary pressure in the United States, and perhaps force faster rate hikes from the Federal Reserve.

"These cross influences are confused enough that one has to stick with the broader trend that we still view as bond negative," said Alan Ruskin, research director at 4CAST.

The 10-year Treasury note (US10YT=RR) fell 9/32 in price, lifting its yield to 4.51 percent from 4.47 percent late on Thursday. Yields had been down at 4.31 percent just a week ago before heavy technical pressure and unease over inflation triggered the biggest one-day sell-off since May.

The resulting break of previous highs at 4.42 percent had turned the chart outlook very bearish and dealers were looking for a test of 4.57 percent on the way to last July's peaks around 4.65 percent.

The five-year note (US5YT=RR) dropped 6/32, taking its yield to 4.19 percent from 4.14 percent. Yields on the two-year note (US2YT=RR) rose to 3.70 percent, their highest reading since early 2002, from 3.65 percent.

Much of the selling was concentrated in longer-term debt with the 30-year bond (US30YT=RR) dropping 18/32 in price. It yield climbed to 4.80 percent from 4.76 percent late Thursday and 4.35 percent just a month ago.

Traders noted that overnight Fed Chairman Alan Greenspan had again said it was unusual to see long-term yields falling while the Fed was raising short-term interest rates, echoing his now infamous "conundrum" comment.

When Greenspan called low long-term yields a conundrum a month ago, the market took it as a veiled warning the yields had fallen too far and began the sell-off which culminated this week with a break to seven-month highs.

Greenspan also played down the impact of foreign central bank buying of Treasuries saying it likely had only a modest impact on yields of perhaps 50 basis points or so.

"Half a point might be modest for him but its life or death for us traders," said one at a U.S. primary dealer.

"Those central banks funded around half our entire trade deficit last year and now own more than a quarter of the Treasury market, and Alan says not to worry? We beg to differ," added the trader.

He noted that just the hint that central banks in Japan and South Korea might consider diversifying away from the dollar had sent shudders through the bond market in recent weeks.

Greenspan speaks later on Friday but the subject of ""Bank Regulation" suggested he would not say anything market moving.


LINK: http://biz.yahoo.com/rb/050311/markets_bonds_1.html