Treasury Market Watch

Treasury Prices Fall After Inflation News

U.S. prices are rising faster than expected

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MARKETSCOPE : Treasury bond prices fell on Monday after economic indicators fanned concerns about inflation.

Bond prices deepened losses late in the day after comments from CNBC that Fed Chairman Bernanke feels the financial markets have incorrectly interpreted his stance on monetary policy and inflation as dovish.

The benchmark 10-year note tumbled 20/32 to 95-04/32 for a yield of 5.14% as of 3:40 pm Eastern Daylight Time. The 30-year bond sank 28/32 to 89-05/32 for a yield of 5.22%.

News hit that the core PCE deflator, the Federal Open Market Committee's favorite inflation gauge, was up a bit higher than the expected 0.3% on the month after a 0.1% gain in February. It is up 2.0% on a yearly basis, from 1.8%.

The ISM index climbed to 57.3 in April from 55.2 in March, its 35th month of expansion. U.S. construction spending rose 0.9% in March after gaining a revised 1.0% in February. U.S. Personal Income rose 0.8% in March from February's 0.3%. Personal Consumption Expenditures rose 0.6% after gaining a revised 0.2% in February.

"A jump in core inflation readings brings the annual rate of inflation to the upper bound of the Fed's target zone," says Drew Matus, of Lehman Brothers. He thinks the Fed will move the Fed funds rate to 5.5% by the end of the third quarter.

But pundits see some hope.

"Globalization is holding down inflation; the most recent report on US labor costs is especially encouraging" says Stephen S. Roach, of Morgan Stanley in New York. "Major central banks only need to normalize policy settings; authorities in Japan and China are the latest to join the ranks in doing so."

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report.
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