TREASURIES-Prices gain as inflation data supports Fed policy

Fri Dec 14, 2012 9:46am EST

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* Fall in Nov CPI points to benign inflation
    * Yields rise on the week under supply pressure
    * US fiscal crisis worries support Treasuries prices

    By Chris Reese
    NEW YORK, Dec 14 (Reuters) - U.S. Treasury debt prices rose
on Friday after data pointed to tame inflation pressure that
should allow the Federal Reserve to maintain its ultra-easy
monetary policy in an effort to stimulate economic growth.
    U.S. consumer prices fell in November for the first time in
six months, the Labor Department said. Its Consumer Price Index
dropped 0.3 percent last month as a sharp decline in gasoline
prices offset increases in other areas. 
    "The crux of this report is simply that the inflationary
backdrop remains very benign, providing the Fed with
considerable breathing room to keep monetary policy
accommodative," said Millan Mulraine, a senior economist at TD
Securities in New York.
    The tame inflation data and the outlook for easy monetary
policy supported the case for lower rates, and benchmark 10-year
notes rose 6/32 in price to yield 1.71 percent, down
from 1.73 percent late Thursday. Thirty-year bonds 
were 19/32 higher to yield 2.88 percent, down from 2.90 percent.
    On Wednesday, the Federal Reserve announced a new round of
monetary stimulus and took the unprecedented step of indicating
interest rates would remain near zero until unemployment falls
to at least 6.5 percent and longer-term inflation projections
remain below 2.5 percent. 
    While Treasuries prices rose following the release of the
consumer price data, a key measure of investors' inflation
expectations in the U.S. bond market fell.
    The breakeven rates, or yield gaps between regular
Treasuries and Treasury Inflation Protected Securities, declined
broadly, with the five-year breakeven rate dipping to 2.07
percent from 2.10 percent late on Thursday.
    Despite Friday's higher Treasuries prices, yields have risen
through the week on supply pressure, better-than-expected data
and uncertainty over the long-term impact of the Federal
Reserve's latest move.
    The Treasury sold $66 billion of U.S. government debt this
week, and next week it will offer two-year, five-year and
seven-year notes, as well as five-year Treasury
inflation-protected securities.
    Yields remain not far off historic lows however with ongoing
price support from safe-haven buying in worries the U.S.
government may not be able to stave off a looming fiscal crisis
spurred by steep tax increases and spending cuts set to be fazed
in beginning early next year.
    President Barack Obama and House of Representatives Speaker
John Boehner held a "frank" face-to-face meeting on Thursday in
an effort to break an impasse in talks to avert the so-called
"fiscal cliff."
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