* U.S. CPI, U. Mich data fan low growth view
* Stock retreat fuels safe-haven demand for bonds
* U.S. industrial output rises more than expected in July
(Updates prices, adds swap table)
By Ellen Freilich
NEW YORK, Aug 14 U.S. Treasury debt prices rose
on Friday after data suggested U.S. inflation was tame and on a
report showing consumers grew more cautious in August caused
investors to buy bonds instead of riskier assets like stocks.
The figures reinforced the notion that the Federal Reserve
will keep benchmark interest rates near zero and maintain its
quantitative easing policy for a long time even if the U.S.
economy emerges from the worst downturn in 70 years.
"It's a touch-and-go situation. There's definitely an
element of insecurity" with U.S. consumers, said Ron D'Vari,
chief executive at NewOak Capital in New York. "Some people see
value in bonds here."
Major Wall Street stock indexes fell sharply on concerns
about the economy provoked by the dour consumer mood reflected
in the Reuters/University of Michigan consumer survey.
Friday's bond market friendly data followed good foreign
demand seen at the $15 billion 30-year Treasury bond auction on
Thursday which provided an upbeat end to the Treasury's record
$75 billion quarterly refunding, analysts said.
The Consumer Price Index, the broadest U.S. inflation
gauge, was unchanged in July, matching analysts' forecasts, and
on a year-over-year basis, was down 2.1 percent as of July.
"This negative CPI print is really good news for
Treasuries," said William Hornbarger, senior fixed-income
strategist with Wells Fargo Advisors in St. Louis, Missouri.
A stronger-than-expected reading on industrial output,
which grew 0.5 percent in July, briefly tempered the rally.
The price on benchmark 10-year Treasury notes US10YT=RR
rose 11/32 to 100-17/32 for a yield of 3.56 percent, down from
3.60 percent late on Thursday and 3.76 percent a week ago.
INFLATION CONCERNS EASE
The "breakevens", or yield spread, between 10-year notes
and 10-year Treasury Inflation-Protected Securities
US10YTIP=TWEB narrowed to 1.71 percent, the tightest since
mid-July, from 1.80 percent late Thursday.
The 10-year breakeven is a proxy for investors' long-term
inflation expectations. That compared with the year-over-year
increase of 1.5 percent on the CPI core rate, which excludes
volatile energy and food prices, in July.
Another market measure of inflation expectations also
shrank after the tame CPI reading. The spread between two-year
and 10-year note yields compressed to 2.48 percent from 2.55
percent a week earlier.
The yield on 30-year bonds US30YT=RR sold on Thursday was
4.41 percent, below the high or clearing yield of 4.54 percent
at the auction.
UNCERTAIN ECONOMIC OUTLOOK
This week's snapshots of the consumer sector - both from
the retail sales report and the consumer sentiment data -
curbed some enthusiasm about a potential economic recovery. The
consumer sector accounts for 70 percent of U.S. economic
The Reuters/University of Michigan index of consumer
sentiment declined to 63.2 in early August, short of the 68.5
reading predicted by analysts. [ID:nN14294408]
"It was a dismal reading," said Cary Leahey, economist at
Decision Economics in New York. "Because the labor market is
still weak, consumers are just getting more and more nervous."
Just a week ago, a better-than-expected July jobs report
that showed a smaller-than-expected payroll decline raised
market confidence in a speedy economic rebound.
(Additional reporting by Richard Leong and Chris Reese)