TREASURIES-Prices rise on glum consumer, subdued inflation

Fri Aug 14, 2009 3:56pm EDT

Related Topics

* U.S. CPI, U. Mich data fan low growth view

* Stock retreat fuels safe-haven demand for bonds

* U.S. industrial output rises more than expected in July (Updates prices, adds swap table)

By Ellen Freilich

NEW YORK, Aug 14 (Reuters) - U.S. Treasury debt prices rose on Friday after data suggested U.S. inflation was tame and on a report showing consumers grew more cautious in August caused investors to buy bonds instead of riskier assets like stocks.

The figures reinforced the notion that the Federal Reserve will keep benchmark interest rates near zero and maintain its quantitative easing policy for a long time even if the U.S. economy emerges from the worst downturn in 70 years.

"It's a touch-and-go situation. There's definitely an element of insecurity" with U.S. consumers, said Ron D'Vari, chief executive at NewOak Capital in New York. "Some people see value in bonds here."

Major Wall Street stock indexes fell sharply on concerns about the economy provoked by the dour consumer mood reflected in the Reuters/University of Michigan consumer survey.

Friday's bond market friendly data followed good foreign demand seen at the $15 billion 30-year Treasury bond auction on Thursday which provided an upbeat end to the Treasury's record $75 billion quarterly refunding, analysts said.

The Consumer Price Index, the broadest U.S. inflation gauge, was unchanged in July, matching analysts' forecasts, and on a year-over-year basis, was down 2.1 percent as of July.

"This negative CPI print is really good news for Treasuries," said William Hornbarger, senior fixed-income strategist with Wells Fargo Advisors in St. Louis, Missouri.

A stronger-than-expected reading on industrial output, which grew 0.5 percent in July, briefly tempered the rally.

The price on benchmark 10-year Treasury notes US10YT=RR rose 11/32 to 100-17/32 for a yield of 3.56 percent, down from 3.60 percent late on Thursday and 3.76 percent a week ago.

INFLATION CONCERNS EASE

The "breakevens", or yield spread, between 10-year notes and 10-year Treasury Inflation-Protected Securities US10YTIP=TWEB narrowed to 1.71 percent, the tightest since mid-July, from 1.80 percent late Thursday.

The 10-year breakeven is a proxy for investors' long-term inflation expectations. That compared with the year-over-year increase of 1.5 percent on the CPI core rate, which excludes volatile energy and food prices, in July.

Another market measure of inflation expectations also shrank after the tame CPI reading. The spread between two-year and 10-year note yields compressed to 2.48 percent from 2.55 percent a week earlier.

The yield on 30-year bonds US30YT=RR sold on Thursday was 4.41 percent, below the high or clearing yield of 4.54 percent at the auction.

UNCERTAIN ECONOMIC OUTLOOK

This week's snapshots of the consumer sector - both from the retail sales report and the consumer sentiment data - curbed some enthusiasm about a potential economic recovery. The consumer sector accounts for 70 percent of U.S. economic activity.

The Reuters/University of Michigan index of consumer sentiment declined to 63.2 in early August, short of the 68.5 reading predicted by analysts. [ID:nN14294408]

"It was a dismal reading," said Cary Leahey, economist at Decision Economics in New York. "Because the labor market is still weak, consumers are just getting more and more nervous."

Just a week ago, a better-than-expected July jobs report that showed a smaller-than-expected payroll decline raised market confidence in a speedy economic rebound. (Additional reporting by Richard Leong and Chris Reese)

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