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Dollar continues to sink as dow tumbles { April 2006 } Original Source Link: (May no longer be active)
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Treasuries Drop as Consumer Price Gains Spark Inflation Concern
May 17 (Bloomberg) -- U.S. Treasuries fell after a government report showed consumer prices in April climbed more than economists forecast, bolstering concern that inflation is accelerating.
The Labor Department report adds to speculation that the Federal Reserve may be falling behind in its effort to keep inflation in check even as the economy shows signs of slowing. Inflation erodes the purchasing power of a bond's fixed payments.
Investors ``want the Fed to be vigilant on inflation,'' said Peter Cordrey, head of liquid products, which include Treasuries, at Prudential Investment Management in Newark, New Jersey. The firm oversees about $170 billion in fixed-income assets. ``But the Fed is in a tough spot. The economy can slow down and still have inflation.''
The yield on the benchmark 10-year note rose more than 5 basis points to 5.15 percent at 3 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The increase in yield is the most since it climbed 9 basis points on May 1. The price of the 5 1/8 percent note maturing in May 2016 fell about 3/8, or $3.75 per $1,000 face amount, to 99 25/32.
Today's report comes a week after Fed policy makers said in a statement that inflation expectations are contained.
``The bond market is in a `show me' mode,'' said Sharon Stark, chief fixed-income strategist at brokerage Stifel Nicolaus & Co. in Baltimore. ``The bond market does not have a lot of confidence in the Fed's projections right now.''
Inflation-Linked Debt
The gap in yields between Treasuries and U.S. inflation- linked debt due in 10 years expanded by 5 basis points to 2.70 percentage points. The low this year was 2.31 percentage points on Jan. 5. The difference represents the average rate of inflation traders expect over the life of the securities.
Treasuries of all maturities have lost 1.6 percent this year, including reinvested interest, compared with a gain of 1.8 percent at this point in 2005, according to Merrill Lynch & Co.'s U.S. Treasury Master Index. Ten-year yields, which move inversely to the price of the notes, are up from the low this year of 4.29 percent in January.
The consumer price index surged 0.6 percent in April after increasing 0.4 percent a month earlier, the Labor Department said in Washington. Economists expected a 0.5 percent gain, based on the median of 72 estimates in a Bloomberg survey.
Excluding food and energy, consumer prices climbed 0.3 percent last month after gaining 0.3 percent in April. The overall index gained 3.5 percent from a year earlier, compared with 3.4 percent a month earlier.
Market `Fear'
``There is an inflation fear in the marketplace,'' said Richard Gilhooly, fixed-income strategist at BNP Paribas Securities Corp. in New York. BNP is one of 22 primary dealers that trade directly with the Fed. ``The market is very emotional about inflation, and it's not going to rally significantly until we get a benign reading on core CPI.''
Bill Gross, manager of the world's largest bond fund, abandoned his forecast that 10-year U.S. Treasury yields may fall to 3 percent as a global economic expansion causes central banks to raise interest rates more than anticipated.
The yield will probably range from 4 percent to 5.5 percent until 2010, Gross, chief investment officer of Pacific Investment Management Co., wrote in his monthly Investment Outlook on the firm's Web site yesterday. A year ago, he said the yield would fluctuate between 3 percent and 4.5 percent.
`A Couple More'
Fed policy makers have lifted borrowing costs at every meeting since June 2004, bringing the key rate to 5 percent, the highest in more than four years. Interest-rate futures showed traders expect a 50 percent chance of the Fed lifting its target rate to 5.25 percent at the meeting on June 29, up from 36 percent before the report.
``I am expecting yields to go up,'' said Steve Bohlin, who oversees $2 billion as managing director at Thornburg Investment Management in Santa Fe, New Mexico. ``We're probably going to see a couple more moves from them,'' he said of the Fed. Ten-year Treasury yields will have ``a floor of 5.5 percent and a high of 6.5 to 7 percent,'' Bohlin said.
A weaker dollar has added to the drop in Treasuries this year. The dollar is down 7.1 percent since Dec. 31 against the euro and 6.2 percent versus the yen.
The dollar rose today against the euro after French Finance Minister Thierry Breton signaled further gains in the common currency would not be welcome. A weak U.S. currency typically reduces the attraction of dollar-denominated assets to international investors.
``The main concern to everybody is the dollar,'' said Michael Franzese, head of U.S. Treasury trading for Salt Lake City-based Zions First National Bank. ``Nobody is buying dollar assets. That's what's hurting us.''
Foreign central banks in March were net sellers of Treasury notes for the first time in six months, the government said on May 15.
Last Updated: May 17, 2006 15:05 EDT
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