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Treasuries Get a Lift From Falling Stocks and Fed Words

The minutes of the Fed's Oct. 3 meeting show a retreat from its aggressive posture on interest rates.

Bond prices rose modestly on light volume, thanks to sagging stock prices and some soothing words from the

Fed.

The bond market also continued to benefit from the idea that the next occupant of the White House, no matter who it is, will be ineffectual because of the controversy surrounding the election. If so, that will leave in place fiscal trends that have greatly benefited the bond market. Specifically, the piling up of federal budget surpluses, which has meant greatly reduced issuance of

Treasury securities.

"People are starting to look past the election to political gridlock," said David Ging, Treasury market strategist at

Credit Suisse First Boston

.

But the unresolved status of the election also continued to limit trading activity,

Merrill Lynch

government bond strategist Gerry Lucas said. "We're just waiting to see what's going to happen in Florida," Lucas said. "The market's just in limbo."

The only major economic report of the day -- the October

Consumer Price Index

(

definition |

chart |

source

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) -- was in line with expectations, and therefore a nonevent.

The benchmark 10-year

Treasury note rose 11/32 to 100 19/32, lowering its yield 4.5 basis points to 5.666%. Shorter-maturity yields fell by comparable increments.

The 30-year

Treasury bond gained 13/32 to 107 6/32, dropping its yield 2.9 basis points to 5.742%.

At the

Chicago Board of Trade

, the December

Treasury futures contract added 8/32 to 100 23/32.

The CPI rose 0.2% in October, and the core CPI, which excludes volatile food and energy prices, also rose 0.2%. Those results were in line with the average forecast of economists polled by

Reuters

.

The annual rates of overall and core inflation declined slightly. The overall inflation rate fell to 3.4% from 3.5% in September, and the core inflation rate fell to 2.5% from 2.6%.

More important to the bond market today (to the extent that anything was -- volume as measured by

GovPX was $20.5 billion through 3 p.m. EST, 20.4% less than average for a Thursday over the last month) were the stock market action and the release of the

minutes of the

Federal Open Market Committee's Oct. 3 meeting.

"Stocks have certainly been one of the factors driving the market today," Credit Suisse's Ging said. Falling stock prices can boost bond prices to the extent that people see them as an indicator of future economic activity.

The minutes of the FOMC's Oct. 3 meeting, for their part, gave bond investors reason to hope that at its next meeting on Dec. 19 the committee will change its

assessment of the risks facing the economy. At its latest meeting yesterday, the FOMC maintained the view that the risk of inflation is greater than the risk of an economic slowdown. As long as that's the case, the committee is unlikely to lower the

fed funds rate.

But the minutes of the Oct. 3 meeting reveal that the FOMC is inclined to consider moving to a risks-balanced assessment before the end of the year. "Some

committee members expressed the opinion that those risks were now less decidedly tilted to the upside and that a reconsideration of the sentence might be warranted over the next several months, but they believed that a change at this point would be premature," the minutes say.

Short-maturity Treasuries, which correspond most closely to the fed funds rate, rallied in response to the release of the minutes, Merrill's Lucas said.

In other news, the Treasury Department conducted its latest bond

buyback, purchasing $1 billion of

callable issues maturing between 2010 and 2014.

Economic Indicators

In other economic news, the

Philadelphia Fed Index

(

definition |

chart |

source

) rose to 5.2 in November from negative 3.8 in October, indicating renewed strength in the manufacturing sector.

The

Housing Market Index

(

definition |

chart |

source

) rose to 65 in November, the highest level in nine months, from 63 in October.

Initial jobless claims

(

definition |

chart |

source

) fell to 326,000 in the latest week, from the 22-month high of 346,000 they reached the previous week, indicating a tightening labor market. The four-week average rose to 322,250, a 21-month high, from 318,000.

Finally,

real earnings

(

definition |

chart |

source

) were unchanged in October as a 0.1% increase in a segment of the CPI offset a 0.1% increase in average weekly earnings as measured by the

employment report.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 108.99 yen, up from 108.88. The euro was worth $0.8521, down from $0.8570. For more on currencies, see

TSC's

Currencies column.

Crude oil for December delivery at the

New York Mercantile Exchange

fell to $35.12 a barrel from $35.58.

The

Bridge Commodity Research Bureau Index

fell to 226.00 from 226.83.

Gold for December delivery at the

Comex

rose to $266.30 an ounce from $265.60.