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CPI Lifts Bonds, But Only Briefly

The gains represented short-covering to a large degree, an analyst says.

Bond prices jumped strongly this morning after the core

Consumer Price Index

rose less than expected. But bonds have since surrendered most of those gains, due in part to continuing erosion in the value of the dollar against the yen.

The benchmark 30-year Treasury issue was lately just 1/32 higher in price at 100 3/32, its yield unchanged at 6.12%. Earlier it rose as much as 25/32. Shorter-maturity note yields were outperforming the bond somewhat, shedding anywhere from 2 to 4 basis points.

The bet seems to be that the 0.1% increase in the core CPI, which excludes volatile food and energy prices, will stay the


hand at its next meeting on Oct. 5, keeping the central bank from hiking the short-term fed funds rate for a third time this year. Economists polled by


had forecast a 0.2% rise in the core CPI.

The year-on-year growth rate of the core CPI slipped to 1.9%, the lowest rate of the decade.

"The economists contend that price pressures are the most important thing, and we're not getting them," said Mark Mahoney, Treasury market strategist at

Warburg Dillon Read

in Stamford, Conn.

The overall CPI rose 0.3%, in line with expectations, lifting the year-on-year rate to 2.3%. A 2.7% increase in energy costs accounted for about two-thirds of the move, the

Labor Department


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At the

Chicago Board of Trade

, where futures contracts on the fed funds rate are listed, traders have so far downgraded the likelihood of another 25-basis-point rate hike on Oct. 5 to 26% from 36% yesterday. The Fed hiked the funds rate from 4.75% to 5% in June, and to 5.25% in August.

Marilyn Schaja, money-market economist at

Donaldson Lufkin & Jenrette

, said the CPI report, combined with the

statement that accompanied the Fed's Aug. 24 rate hike, makes it very unlikely that there will be another move in October. The statement said that the two rate hikes, "together with the policy action in June and the firming of conditions more generally in U.S. financial markets over recent months, should markedly diminish the risk of rising inflation going forward."

But, she added, "the data since the last tightening" -- including

yesterday's stronger-than-expected August

retail sales

report -- "still keep the threat of Fed tightening through the rest of this year and early next year." A December rate hike is probably out of the question because of the strong preference for liquidity that will presumably exist at that time, with Y2K approaching, but a November hike is imaginable, Schaja said.

The bond market surrendered its gains because they were due in large part to short-covering, said Ken Fan, bond strategist at

Paribas Capital Markets

. "A lot of people were short at the end of yesterday's selloff, and with the CPI they were forced to cover," he said. "Once that occurred, it gave people a chance to sell."

Meanwhile the latest chapter of the dollar's descent against the yen has it at 104.20, down from 105.88 yesterday. It traded as low as 103.40 overnight.

While a weakening dollar lifts import prices and can lessen demand for dollar-denominated financial assets, Warburg Dillon Read's Mahoney is skeptical that its struggle against the yen is having much of an effect on the Treasury market. "The dollar doesn't seem to matter much because it's not declining against the euro," he said. To pressure bond prices, "I think we need to see the U.S. declining against

both Europe and Japan."