Treasuries Rise as Questions About Health of Economy Remain
U.S. Treasuries rose for a second straight day as equities slipped and questions about the economy remain.
In recent activity on the Treasury market, the two-year note gained 1/32 to 100 10/32, lowering the yield, which moves in the opposite direction of the price, to 4.074%. The 10-year benchmark note rose 7/32 to 98 2/32, yielding 5.257%, while the 30-year Treasury bond climbed 18/32 to 96 1/32, with a yield of 5.652%.
"There's some expectation that tomorrow's
retail sales will be weaker than expected," said Don Galante, head Treasury trader at
Fuji Securities
, adding that the recent softness in equities was "helping" to raise bond prices as investors shift their money into the less volatile fixed-income market. Galante also said he thinks this week's
consumer price index and
producer price index could be higher than expected because of the surge in energy costs. As a result, the yield curve (the difference in yields between two different securities) could become steeper, Galante said, as the long end of the market may be "under pressure" from concerns about inflation.
Short-term Treasury notes tend to rally on poor economic data as investors expect the
Federal Reserve to keep up its policy of lowering interest rates. Longer-dated securities, on the other hand, are inflation sensitive and generally perform poorly when inflation seems to be a threat.
According to a recent poll conducted by
Reuters
, economists on average are expecting both the PPI and the CPI in May to rise by 0.3%, matching a 0.3% gain in April for both measures. Excluding volatile food and energy prices, economists estimated that core PPI and CPI climbed 0.1% and 0.2%, respectively, compared with gains of 0.2% for each in April. Nevertheless, the poll indicated the experts believe inflation risks remain moderate. (
TheStreet.com's
Aaron Task recently
addressed the latest views on inflation.)
"We do agree with the Fed that inflation will remain benign," said Kenneth Kim, an economist at
Stone & McCarthy Research Associates
. Kim also said the Chicago Fed's
national activity index
-- a compilation of leading indicators -- suggests that the risk of recession has risen while the risk of inflation has eased. However, the economist conceded the threat of higher prices "remains to be seen" and that higher-than-expected CPI and PPI readings would "raise warning flags" in the market.