Bonds Reverse Friday's Rally, Brace for CPI - TheStreet

Bonds Reverse Friday's Rally, Brace for CPI

The long bond's yield spiked to 6.32% as blue-chip stocks rallied late, setting the stage for tomorrow's Consumer Price Index release.
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Uncertainty surrounding tomorrow's September

Consumer Price Index

dragged Treasuries lower and spiked the long yield above 6.30%. Traders fear the report will turn out stronger than the 0.3% forecast for the core CPI. A recovery in the

Dow

also contributed to reversing

Friday's bond rally, which was built on the back of a selloff in stocks.

The 30-year Treasury bond was lately down 21/32 to 97 12/32. The yield rose 6 basis points to 6.32%.

Overall, strategists described the activity as muted. The importance of tomorrow's indicator kept people from buying today, especially after an unexpected 0.8% increase in September's core

Producer Price Index

, released on Friday.

When stocks sold furiously Friday, the 30-year bond recovered to gain almost a point in price terms. Today the Dow tacked on most of its gains in the last half-hour of trading, sending bonds to the day's lows.

"Intraday, stocks are trading against bonds," said Tony Crescenzi, chief fixed income strategist at

Miller Tabak

. "The net of it all is that we've been creeping lower most of the day. It reflects concern not of a repeat of the PPI, but some reflection of the PPI trend."

The overall CPI, a measure of consumer inflation, is forecast to rise 0.4%, according to economists as forecast by

Reuters

. Already, some believe the overall figure will jump more than that, after seeing a 1% increase in food prices in the PPI. Two traders said today's selling was partially due to dealers protecting themselves from larger-than-expected increases in the report.

"I think the market is discounting bad news, but if the number comes up substantially above expectations, I think it will trade down," said Maryann Hurley, vice president in trading at

D.A. Davidson

in Seattle.

The core CPI, considered more important because it eliminates volatile food and energy prices, has risen 0.3% or greater just once in the last eight months (April's 0.4% increase). Some economists expect that increases they've witnessed in consumer prices will flow through to the government's statistics this month. Mark Vitner, economist at

First Union Capital Markets

, said the CPI increase could surpass forecasts based on steady increases in the housing sector.

The PPI measures, very generally, increases in the prices of goods at the wholesale level. While it is common to pair the two indicators, prices of goods only account for about one-half of the CPI, meaning increases seen in the PPI will be muted in the CPI.

"Some of those factors

in the PPI will show up again in a different way, in smaller increases," said Crescenzi. Specifically, he's referring to increases in tobacco prices and car prices, both of which jumped in September's PPI report.

Beyond the CPI, the market has just

Alan Greenspan

to look forward to. The

Fed

chairman will speak at an

Atlanta Fed

conference on financial risk at 1 p.m. EDT. Greenspan jawboned the stock market lower last week by warning against the current valuation of asset prices.

"The

stock market reaction was really surprising," said Crescenzi, adding that last Thursday's

speech repeated themes the chairman has expressed previously. "Greenspan really just tried to perform his duty as Fed chairman, which is to inject some prudent caution into the financial markets."