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U.S. Treasury Debt Prices Rise
Tuesday April 19, 5:43 pm ET
By Pedro Nicolaci da Costa

http://biz.yahoo.com/rb/050419/markets_bonds.html?.v=1

NEW YORK (Reuters) - U.S. Treasury debt prices rose on Tuesday as benign inflation figures and increased risk-aversion following grim earnings news from General Motors (NYSE:GM - News) gave the bond market a boost.

Benchmark yields were once again bobbing near two-month lows as growing expectations of a slowdown in economic growth favored safe-haven government debt.

Ten-year notes (US10YT=RR) rose 14/32 for a yield of 4.22 percent, down from 4.28 percent on Monday and a world away from a peak of 4.697 hit less than a month ago.

"This is a market with a mission," said Gerald Lucas, chief treasury and agency strategist at Banc of America Securities.

That mission was to move higher no matter what. Treasuries prices were climbing despite a modest rebound in equities from near six-month lows, driven by better earnings from big-time names like Coca-Cola (NYSE:KO - News) and Texas Instruments (NYSE:TXN - News).

"The whole reverse relationship between equities and bonds seems to have broken down," said Lucas.

Indeed, two-year Treasury notes (US2YT=RR) were up 2/32 in price, taking their yield to 3.51 percent from 3.54 percent. Five-year notes (US5YT=RR) rose 8/32, lowering yields to 3.86 percent from 3.91 percent, while the 30-year bond (US30YT=RR) jumped 28/32, its yield easing to 4.56 percent.

A tame reading on core producer prices helped assuage fears of an imminent spike in inflation, the arch-enemy of fixed-income investors.

Overall, the producer price index shot up 0.7 percent. But outside of food and energy costs, prices advanced a mild 0.1 percent for the second straight month, soothing worries that soaring oil prices would stoke inflation more broadly.

William Poole, president of the St. Louis Federal Reserve, called the U.S. inflation outlook "very favorable" in an afternoon speech.

Given the comforting prospect of subdued price growth, dealers went back to pondering the possibility of a slower economy, with bulls even entertaining hopes of an eventual pause in monetary tightening from the Fed.

Doubts about the economy were highlighted by poor results from General Motors, which posted a $1.1 billion quarterly loss -- its worst since 1992.

This shoddy performance reinforced suspicion that the automaker's bonds might soon be downgraded to junk status, and helped secure a safety bid for government debt. Buying of Treasuries related to the pricing of a $1.25 billion deal from Freddie Mac (NYSE:FRE - News) also supported the market, analysts said.

The risk of slower growth was acknowledged by Federal Reserve Bank of San Francisco President Janet Yellen, who said high energy prices were dampening consumer spending and creating a situation similar to the summer "soft patch" of 2004.

That possibility has prompted the same market that only two weeks ago had been primarily worried about a more aggressive Fed to begin talking about the prospect of a pause in interest rate hikes.

Futures markets (0#FF:) reflected that shift, having all but priced out the chance of a half-point hike and trimmed expectations for how high rates would be at the end of the year.

More minor data on Tuesday offered further hints of softness in consumption. The Redbook measure of chain store sales showed sales so far in April running 3.8 percent below March, a performance Redbook termed "disappointing."

Housing starts slumped 17.6 percent in March, while permits fell 4.0 percent. Analysts, though, suspected the drop was just a correction from previous strength and argued against taking the pullback too seriously.

Still to come on Tuesday was a speech by Fed Bank of Cleveland President Sandra Pianalto on "Monetary Policy" around 7:15 p.m. EDT