Treasuries Shrug Off Inflation Fears to End Mixed

After moving up and down during the day, Treasury prices were mixed as the money market managed to shrug off inflationary worries resulting from a higher than expected Consumer Price Index (definition | chart | source ). Short-term notes led the progress of fixed income securities and the long bond trimmed its losses by the close as well after having lost a third of its value during the day. Yields for government securities remain at or near their two-year lows.

Traders were also gauging the movement of equities. Stocks managed to remain near neutral this morning but then gave way in the afternoon. However, there was less safe-haven movement toward government Treasuries than usual.

The benchmark 10-year Treasury note was unchanged at 101 27/32, and yielding 4.674%.

The 30-year Treasury bond fell 6/32 to 101 14/32, raising its yield 1.4 basis points to 5.279%.

The yield curve, which tracks the yields of fixed income securities by their date to maturity, has steepened. The difference between the yields of the two-year note and the 30-year bond is at 106 basis points or 1.06%, its widest spread since Oct.1998. The Treasury department intends to sell about $11 billion in new two-year notes next Wednesday and buy back $1.75 billion worth of the 30-year within this week.

Although most analysts expect the Federal Reserve to cut interest rates at least once more this year, the slight rise in the consumer price index (CPI), which was released this morning, has stirred up the possibility of inflation once again. However, such fears are likely to be temporary. The April fed funds futures are forecasting a greater than 50% chance of a quarter-point cut before the next FOMC meeting in mid-May.

Henry Willmore at Barclays Capital contends in the firm's economics newsletter that those hoping for and expecting an intermeeting cut in interest rates may be ignoring the fact that inventory levels in the auto industry will be balanced soon; that the "core" measure of inflation (which excludes volatile food and energy prices) is rising; and that legislative progress is being made toward a large tax cut.

He notes that the importance of inventory levels in the central bank's recent actions is clear: Central bank officials, he observes, have said all along that the recession in manufacturing will be over once inventory levels have been corrected. Meanwhile, inflationary fears and the benefits of the proposed $1.6 trillion dollar tax cut are issues on the Fed's back burner, not important now but potentially important down the line. For now, the Fed has stated repeatedly that it is not concerned about inflation and much time may pass before the new tax policy takes concrete effect.

Fed watchers are unanimous on one thing though -- that there will be further interest rate cuts this year. The consensus number for the fed funds rate is 4.5% by midyear.

At the Chicago Board of Trade, the March Treasury futures contract rose 4/32 to 106 25/32.

Economic Indicators

The CPI for February rose by 0.3% after having gone up sharply by 0.6% in the previous month. The latest rise is slightly above economists' forecasts of 0.2% growth as put out in the Reuters poll. However, with the Fed's attention on the general state of the economy, such a development will be minimized in scope unless it becomes prolonged. After excluding the more volatile food and energy prices, the index has gone up by 0.3%, the same rate of growth as in the previous month. Again, it was above expectations by 0.1%.

Real earnings (definition | chart | source ), which are weekly wages adjusted for inflation, fell by 0.1% in February after having risen by that amount in January. They continue to decline on a 12-month basis, having fallen by 0.6% last month after suffering rates losses of 0.4% and 0.3% in the two months prior.

The latest Mortgage Applications Survey (definition | chart | source ) indicates a rise in the buying but a drop in the refinancing of new homes. The Purchase Index rose to 299.8 for the week ended March 16 from 289.9 recorded the previous week. The Refinancing Index fell to 2053 from 2264.8 over the same period. Both indices start from a base value of 100 in March, 1990.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 123.33 yen, up from 122.28. The euro was worth $0.8952, down from $0.9092. For more on currencies, see TSC's Currencies column.

Crude oil for April delivery at the New York Mercantile Exchange rose to $26.75 a barrel from $26.12.

The Bridge Commodity Research Bureau Index rose to 213.79 from 212.83.

Gold for April delivery at the Comex rose to $261.90 an ounce from $260.50.