TREASURIES-Prices gain as manufacturing weak, inflation subdued

Wed May 15, 2013 10:47am EDT

Related Topics

* U.S. industrial output falls more than expected in April
    * NY Fed manufacturing shrinks, despite growth expectations
    * Producer price index shows biggest decline in three years
    * Euro zone posts sixth straight quarter of contraction

    By Luciana Lopez
    NEW YORK, May 15 (Reuters) - U.S. Treasury debt prices rose
on Wednesday after a week of losses as manufacturing data
pointed to lingering weakness in the economy and price pressures
remained subdued.
    U.S. industrial production fell more than expected in April,
down 0.5 percent. 
    Regional data suggested there could be more contraction
ahead, as well, with the New York Fed's "Empire State" general
business conditions index shrinking to minus 1.43 in May,
despite expectations for growth from April. 
    In addition, the U.S. Labor Department said on Wednesday its
seasonally adjusted producer price index fell 0.7 percent last
month, the biggest decline since February 2010. 
    That combination of economic weakness and slow inflation,
analysts said, suggested that the Federal Reserve could continue
its massive easing program for months, if not longer. 
    "So we've got slower growth, sliding inflation and central
bank stimulus," said Kim Rupert, managing director of global
fixed income analysis at Action Economics LLC in San Francisco.
    "Today's data add to expectations that there's not going to
be any slowing in central bank stimulus anytime soon," she
added.
 
    The Fed is now buying $85 billion per month in Treasuries
and mortgage-backed securities in a bid to boost the U.S.
economy and bring down stubborn unemployment.
    Prices for 10-year notes rose 12/32 to yield
1.942 percent, from 1.9766 percent late on Tuesday.
    Prices for 30-year bonds advanced 25/32 to yield
3.158 percent, from 3.1939 percent late on Tuesday.
    Investors are trying to gauge when the Fed might slow or
even stop its easing program.
    While some labor market data have been encouraging recently,
there have remained enough disappointing data - such as
Wednesday's factory figures - to underscore the continued
potential for weakness in the world's biggest economy.
    "Today's figures remain consistent with the soft patch story
that is likely to prevent the Federal Reserve from scaling back
their QE efforts before" the fourth quarter of this year, said
James Knightley of ING Bank in a note to clients.
    The unemployment rate also remains at 7.5 percent, a full
percentage point above the 6.5 percent that Fed policymakers
want to see.
    And with inflation also well below target - the Fed wants to
see that figure around 2 percent - there are few concerns that
price pressures will eat into economic gains.
    "Over the next year at least, inflation is more likely to be
too low rather than too high," said Paul Dales, senior U.S.
economist with Capital Economics in Toronto.
    Indeed, the economy is still struggling, with analysts
forecasting around 2 percent expansion this year - hardly the
robust growth that once made the U.S. economy a global engine.
    Nevertheless, that's still better than what the euro zone is
facing: data on Wednesday showed the monetary union's economy
has contracted for six straight quarters.
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