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US bonds under pressure from PPI

January 18, 2007 | Financial Times

US Treasuries fell yesterday after stronger-than-expected data on producer prices and firmer conditions in the housing market further reduced investor hopes of interest rate cuts this year.

The producer price index rose 0.9 per cent in December, while the core PPI, which excludes food and energy, increased 0.2 per cent, after climbing 1.3 per cent the previous month.

Richard Iley, strategist at BNP Paribas, cautioned that jumps in energy and food prices produced the lion’s share of the upward surprise in the headline figure: “It would be a mistake to view these data as indicative of a renaissance of pricing power at the factory gate.”

Meanwhile, the National Association of Home Builders reported that its index for sales of new homes rose to 35 in January – a six-month high.

A report that showed higher-than-expected industrial production also put some downward pressure on bond prices.

By late afternoon in New York, the yield on the 10-year bond was 3.6 basis points higher at 4.789 per cent. The two-year note yield was up 4.7 basis points at 4.914 per cent.

The weaker US market weighed on European government bonds, which were earlier cheered by the bullish sentiment in the Japanese government bond market.

JGB prices rose sharply, after local media performed an about-turn to predict no increase in the central bank’s interest rate after its meeting today.

The sudden and uniform change of heart suggested to analysts that the media had been thoroughly briefed by well-placed sources.

The yield on the 10-year bond touched a three-week low, after reaching a two-month high earlier in the week. It closed 5.5bp down at 1.690 per cent. The five-year yield plunged 7bp to 1.250 per cent.

In late trading in London, the 10-year UK gilt yield added 0.8bp to 4.900 per cent and the yield on the two-year gilt was up 3.8bp to 5.441 per cent. Bunds fared better, holding on to gains. The yield on the 10-year Bund edged down 0.1bp to 4.040 per cent and the yield on the two-year Schatz fell 1.6bp to 3.931 per cent.


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