* Prices rise as housing data weakens, Ukraine bonds drop
* Forward guidance, tapering in focus in Fed minutes
* Fed to buy $1 bln-$1.25 bln bonds due 2036-2044
* Producer prices rise, inflation still below Fed targets
By Karen Brettell
NEW YORK, Feb 19 U.S. Treasuries prices rose on
Wednesday as U.S. housing starts recorded their biggest drop in
almost three years, raising concerns about the housing recovery,
and on safety buying as bonds of emerging market countries
including Ukraine dropped on rising civil unrest.
Housing starts in January were likely weighed down by harsh
weather, but the third month of declines in permits pointed to
some underlying weakness in the housing market. Permits to build
homes fell 5.4 percent in January, the largest drop in since
Ukraine's sovereign bonds and currency tumbled on Wednesday
as a renewed wave of violence hit the capital Kiev, adding
pressure on Russia's rouble which has hit an all-time low
against the euro.
"There was a relatively weak housing starts print this
morning as well as lower than expected building permits. We also
had a risk-off tone going into the data this morning with
overnight stocks down and emerging markets also once again
seemingly under pressure," said Michael Pond, head of global
inflation-linked research at Barclays in New York.
Benchmark 10-year notes were last up 8/32 in
price to yield 2.69 percent, down from 2.71 percent late on
Tuesday. Thirty-year bonds gained 9/32 in price to
yield 3.66 percent, down from 3.68 percent.
U.S. producer prices also rose for a second straight month
in January, pushed up by an increase in the cost of goods, but
there was little sign of a broad pick-up in inflation pressures
at the factory gate.
Tepid inflation may complicate the Federal Reserve's
strategy in the intermediate term as it pares its bond purchase
program and moves closer to raising interest rates from record
"Inflation is not an issue with regards to tapering but we
think it will be a more important issue in the year ahead, given
that they have made significant progress in employment but very
little progress on the inflation side of their mandate, where
inflation has moved away from their target over the last year,"
The Labor Department said on Wednesday its seasonally
adjusted producer price index for final demand increased 0.2
percent last month, the largest increase since October. It was
the first release since the expansion of the index to include
services and construction.
The Fed will release minutes from its January meeting later
on Wednesday, which are expected to show that the U.S. central
bank intends to continue cutting its monthly bond purchases if
the economy maintains momentum.
Analysts say that the recent spate of weaker data will make
the minutes somewhat dated and that the employment report for
February will be crucial, after two months of weak employment
gains, in influencing the Fed before its March meeting.
Analysts and investors will also focus on discussion of
forward guidance in the Fed's meeting, with unemployment
dropping at a faster rate than expected to a five-year low of
6.6 percent in January.
The Fed previously said that it would not raise interest
rates until joblessness fell to at least 6.5 percent, a pledge
that policymakers thought would hold until at least mid-2015.
The Fed will buy between $1 billion and $1.25 billion of
bonds due from 2036 to 2044 on Wednesday as part of its ongoing