Treasuries Shake Off Hot PPI as Stocks Tumble - TheStreet

The Treasury market is not for the faint of heart today.

It plunged swiftly upon the 8:30 a.m. EDT release of hotter-than-expected inflation numbers, but has since reversed course and is firmly in positive territory. The upturn occurred in part because economic reports released later in the morning were market-friendly, but also because some of the money that's gushing out of stocks is pouring into bonds.

The benchmark 30-year Treasury bond, which fell as much as 17/32 after the release of the September

Producer Price Index

, was lately up 13/32 at 97 22/32, trimming its yield 3 basis points to 6.30%. Shorter-maturity note yields were lower by similar amounts.

The PPI rose 1.1% overall and 0.8% at its core, which excludes volatile food and energy prices. Economists polled by

Reuters

had expected increases of 0.5% overall and 0.4% core, on average.

Besides blowing the estimates out of the water, the increases were the largest in years. The overall PPI hasn't advanced that much since September 1990, while the core hasn't seen a rise that big since last December.

The numbers bolster the case for another interest-rate hike by the

Fed

when it meets next month. That's true even though the Treasury market has rebounded. The fed funds futures contracts

listed on the

Chicago Board of Trade

are still underwater today.

Much of the gain in the PPI was due to special factors such as an 8.4% increase in tobacco prices, which was expected. The PPI rose more than expected because price increases in other areas were less well anticipated.

Treasuries have rebounded, analysts say, because stocks are selling off in response to the PPI and

Fed

Chairman

Alan Greenspan's

implication in a

speech last night that they are overvalued, and because the day's other economic indicators failed to confirm the PPI's diagnosis of an overheating economy.

September

industrial production

slipped 0.3%, vs. an average forecast for a 0.2% gain, and

capacity utilization

rate fell more than expected, to 80.3%. The capacity utilization rate measures anti-inflationary slack in the industrial economy. Also, the

Consumer Sentiment Index

slipped more than expected, to 105.3.

"The nasty

Dow

trade is helping our market a bit, buoyed by the softer numbers later in the morning,"

Prudential Securities

co-head of government bond trading Bill Kirby said.