TREASURIES-Bonds fall on inflation data, stock gains
* Market run-up seen overdone in the short term * Benchmark yields seen lingering near historic lows * Europe, slowing Chinese growth curb market fall By Chris Reese NEW YORK, July 13 (Reuters) - U.S. government debt prices fell on Friday as news of a surprise rise in producer prices and a rebound in Wall Street stocks reduced the safe-haven appeal of bonds, although benchmark yields remained near historic lows. Investors' digesting of the week's $66 billion worth of longer-dated, coupon-bearing supply also contributed to the pause in the Treasuries market's bullish run. "We've gone back to a bit of a risk-on trade today -- you're seeing some correction in stocks after a pretty horrible week and there is some digestion of (Treasuries) supply," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. The government's producer price index unexpectedly edged up 0.1 percent in June, compared with analysts' expectations of a 0.5 percent drop. The PPI core rate, which gauges the underlying inflation trend, however, remained tame. If inflation accelerates, it erodes bond values. "The PPI was the initial catalyst and then you have a stronger stock market," Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia, said of the main factors for the drop in Treasuries prices. Moreover, technical indicators suggested the market was overbought, making it tough for the 10-year yield to stay below 1.50 percent, analysts and traders said. "In the short term, the market might be a bit overdone," said Jason Rogan, director of Treasuries trading at Guggenheim Partners in New York. Still, underlying support for Treasuries remains rock solid, with robust demand at 10- and 30-year debt auctions that fetched record low yields, analysts said. On lighter-than-usual volume, benchmark 10-year notes traded 5/32 lower in price to yield 1.49 percent, up from 1.48 percent late Thursday. The 10-year yield, which fell for a third straight week, is hovering not far above the 1.44 percent level touched in early June, which is the lowest going back to the early 1800s, based on data gathered by Reuters. The 30-year bond lost 12/32 in price to yield 2.58 percent, up from 2.56 percent late Thursday. The bond yield is just 7 basis points above its record low set on June 1. On Wall Street, stocks rallied partly on gains in bank shares after JPMorgan Chase & Co reported $4.4 billion of credit trading losses in its London offices, but still earned an overall profit that was barely dented by the bad trades. The three major U.S. stock indexes were up more than 1 percent. Despite the market pulling back on Friday, most analysts and traders expect Treasury yields might head even lower, as the contagion risk from debt woes in the euro zone have not abated. Moody's Investors Service surprised markets on Friday by downgrading Italy's debt rating to Baa2, just two rungs above junk status. Worries about flagging growth in the United States and China have fueled bets the central banks of the world's two biggest economies will implement more stimulative measures. "The bond market is pricing in a prolonged crisis in Europe and more Fed easing," said Jim Kochan, chief fixed-income strategist at Wells Fargo Fund Management in Menomonee Falls, Wisconsin, which oversees about $200 billion. Earlier, data showed China's growth rate slowed for a sixth successive quarter to its slowest pace in more than three years, although it was not as weak as some had feared. A report from Thomson Reuters and the University of Michigan showed U.S. consumer sentiment unexpectedly weakened in early July, supporting the view of slowing retail sales. Consumer spending accounts for two-thirds of the U.S. economy. "The market is on a path of lower rates. I wouldn't be surprised if we test these record low yields," Guggenheim's Rogan said. "It's very difficult to sell this market. Bears are out of the market right now." Another ongoing factor that should keep longer-dated yields low is the Federal Reserve's Operation Twist, which involves the U.S. central bank selling its shorter-dated Treasuries and buying longer-dated issues on the open market. On Friday, the Fed bought $1.8 billion in Treasuries that mature February 2036 to May 2042.
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