Bond Rally Halted by Strength in Stocks

A bigger-than-expected rise in the PPI was a fluke.
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Strength in stocks -- which bond traders increasingly view as a key leading indicator of consumer spending and thus of economic growth -- is weighing on the Treasury market this morning despite the dollar's continuing rise against the yen.

The

Producer Price Index

, a key inflation indicator, was much stronger than expected for January, but that was due in large measure to a weather-related spike in food prices.

The benchmark 30-year bond lately was down 15/32 at 98 19/32, lifting its yield 3 basis points to 5.34%.

"The equity market is still the dominant theme for the fixed-income markets," said John Burgess, head of fixed-income at

Bankers Trust

. "In the absence of what I'd call different economic news -- it's all more of the same -- the thinking is that as long as stock prices keep rising, consumers will keep spending, which will keep the economy strong, and bonds will trade down. It's a circuitous type of market movement, but in the absence of other new things to trade off of, the story in the bond market is still the equity market."

In the more-of-the-same department, the

Labor Department's

weekly tally of

initial jobless claims

remained low in this morning's release, rising to just 288,000 from 284,000.

But the PPI's upside surprise -- it rose 0.5% in January, the biggest increase in at least a year -- appeared to challenge the prevailing view that inflation is practically nonexistent. It pushed the year-on-year rate for the series up to 0.9%, the highest since March 1997. But the sharp rise was largely due to the largest increase in food prices in more than five years. Led by fresh fruit prices, which rose 19.6% after the December freeze in California, food prices rose 1.6%. The core PPI, which excludes food and energy prices, fell 0.1%, and the year-on-year rate dropped a tenth to 2.3%.

The dollar continues to rise against the yen as Japanese interest rates decline further, a trend that's been in place since the beginning of the month. A strong dollar supports Treasury prices by helping to control inflation. The dollar lately was worth 119.80 yen, up from 118.56 yesterday and the highest since Dec. 2. But Burgess said the ability of the currency move to keep producing gains in the Treasury market is limited because "it's really a yen story. The dollar is not strengthening against every other currency."