TREASURIES-Yields rise on higher inflation, rate hike speculation

Wed Jan 15, 2014 2:55pm EST

Related Topics

* Yields rise as inflation expectations pick up
    * Intermediate-dated notes weaken on rate hike speculation
    * Fed buys $4.93 billion notes due 2018 and 2019
    * Fed says economy expanded at moderate pace through end of
2013

    By Karen Brettell
    NEW YORK, Jan 15 (Reuters) - U.S. Treasuries yields rose on
Wednesday after U.S. producer prices recorded their largest
increase in six months in December, raising expectations that
inflation may start picking up and potentially bringing forward
the timeline in which the Federal Reserve will start raising
interest rates.
    The Labor Department said on Wednesday its seasonally
adjusted producer price index rose 0.4 percent last month, the
biggest rise since June, after slipping 0.1 percent in November.
The rise in prices received by the nation's farms, factories and
refineries ended two straight months of declines and matched
economists' expectations. 
    "There were some early hints of inflationary pressures;
recently there has been a sense that inflation might have
bottomed," said Boris Rjavinski, an interest rate strategist at
UBS in Stamford, Connecticut.
    Intermediate-dated debt, which is the most sensitive to Fed
interest rate policy, was among the worst performers on
Wednesday as traders and investors tried to evaluate when the
Fed is likely to increase benchmark rates from rock-bottom
levels.
    Some traders think the Fed could move in mid-2015 while
others see a hike as unlikely until at least 2016.
    "The selloff is led by relatively shorter-term maturities.
That kind of reaction means it's not about tapering, but if
inflationary pressures are building, what does that mean for the
timing of the first hike from the Fed?" Rjavinski said.
    Five-year notes were last down 4/32 in price to
yield 1.676 percent, after rising as high as 1.700 percent, and
up from 1.647 percent late on Tuesday.
    Benchmark 10-year notes fell 3/32 in price to
yield 2.886 percent, up from 2.869 percent late on Tuesday.
Thirty-year bonds dropped 3/32 in price to yield
3.810 percent, up from 3.800 percent.
    While the Fed has indicated that it is likely to continue
paring bond purchases, some see an interest rate hike as still a
long way off. New Fed Chair Janet Yellen may be more focused on
the risks of disinflation or deflation as levels continue to run
well below the Fed's 2 percent target.
    "Inflation as opposed to the labor market is going to be the
thing on which Fed policy hinges, ... it's one of the
transitions going on," said Lou Brien, market strategist at DRW
Trading in Chicago. 
    Consumer price data on Thursday will be closely watched for
signs of increasing price pressures.
    Chicago Federal Reserve Bank president Charles Evans, one of
the Fed's most dovish policymakers, told reporters on Wednesday
he expects the U.S. central bank to continue to taper its
massive bond buying at a measured pace of perhaps $10 billion at
each meeting unless data comes in unexpectedly weak. 
    The U.S. economy continued to grow at a moderate pace from
late November through the end of 2013, with some regions
expecting a pick-up in growth, the Fed said on Wednesday in its
Beige Book report of anecdotal information on business activity
collected from contacts nationwide. 
    Atlanta Fed President Dennis Lockhart is due to speak later
on Wednesday.
    The Fed bought $4.93 billion in notes due 2018 and 2019 on
Wednesday as part of its ongoing purchase program. It will
purchase between $1 billion and $1.50 billion in bonds due 2036
and 2043 on Thursday.
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