U.S. Treasuries Fall After April Producer Price Index Increases
U.S. Treasuries Fall After April Producer Price Index Increases
May 17 (Bloomberg) -- U.S. Treasury notes fell after a government report showed wholesale prices in April increased more than forecast.
The rise in the Labor Department's producer price index may stoke concern that faster inflation will prompt the Federal Reserve to keep raising its benchmark interest rate. Inflation erodes the purchasing power of fixed-income payments.
``It's hard to look at any of the macro inflation gauges and argue there's no pick-up in inflation,'' Todd Finkelstein, who manages $2.2 billion of bonds at Boston Advisors Inc. in Boston, said before the report. ``The general trend is going to be for an increase in inflation and an increase in rates'' on Treasuries.
The benchmark 4 1/8 percent Treasury note maturing in May 2015 fell 3/16, or $1.88 per $1,000 face amount, to 99 3/4 at 8:32 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield rose 3 basis points to 4.16 percent. A basis point is 0.01 percentage point.
Prices paid to factories, farmers and other producers rose 0.6 percent in April, the Labor Department said. The median forecast of economists polled by Bloomberg News was for an increase of 0.4 percent. Excluding food and energy, producer prices rose 0.3 percent, compared with a median forecast of 0.2 percent.
Real Yields
Treasury yields adjusted for inflation are low by historical standards. The 10-year note's yield yesterday was about 1.8 percentage points higher than the rate of core consumer inflation. Over the past decade the so-called real yield averaged about 3 percent.
The Labor Department is scheduled to release its consumer price index for April tomorrow.
The central bank May 3 raised its target for the overnight lending rate between banks for the eighth time since June and indicated it is likely to raise it further in the coming months.
The rate probably will rise to 4 percent by year-end, according to the median forecast in a Bloomberg survey of 63 economists taken from April 29 to May 6.
Fed Governor Donald Kohn said interest rates ``still need to rise'' to keep inflation contained. The central bank needs to raise interest rates to keep inflation ``well-contained,'' Kohn told the Australian Business Economists Conference. There is still a risk of prices rising further, he said.
``Kohn gave the impression that he'll certainly be voting for more rate rises at upcoming meetings,'' Michael Thomas, a Sydney- based economist at ICAP Australia Ltd., said before the report. ``The Fed seems to be more worried about inflation upside risks than growth downside risks.''
TIPS
A drop in energy and commodities prices hassled traders in recent weeks to pare expectations that inflation will accelerate, as measured by yields on Treasury Inflation-Protected Securities, or TIPS.
The gap by which 10-year Treasury yields exceed yields on 10- year TIPS shrank to 2.46 percentage points last week, the least since February. The difference represents the expected average inflation rate over the life of the notes and is down from the high this year of 2.78 percentage points in March.
Also today, a Fed report may show U.S. industrial production probably rose 0.2 percent in April, half last year's monthly average, as automakers built fewer vehicles and milder weather cut heating demand, according to the median estimate of economists surveyed by Bloomberg.
The report is scheduled for release at 9:15 a.m. New York time.
Treasury investors are less bearish, according to a weekly poll of clients by JPMorgan Chase & Co. The share of investors betting on lower prices fell to 44 percent from a record 66 percent.
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net
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