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.