February 16, 2011 / 8:23 PM / 8 years ago

TREASURIES-Prices slip on worries over rising inflation

* Prices hurt by rising inflation concerns

* Debt briefly rises on Iranian warships comments

* Industrial output unexpectedly falls in January (Adds strategist’s quote, updates prices)

By Chris Reese

NEW YORK, Feb 16 (Reuters) - U.S. Treasury debt prices slipped on Wednesday although yields held within recent ranges as some fears of rising inflation were tempered by a drop in industrial production.

Trade was choppy, with bonds rising in price late in the morning after comments by Israel’s foreign minister about Iranian warships sparked a safety bid and briefly pushed benchmark yields to the lowest in over a week. The safe-haven interest wore off however early in the afternoon.

Early in the day the government said U.S. core producer prices in January rose at the highest rate in more than two years, raising fears about a build-up in inflation as the recovery gathers pace, which would be a potentially troubling development for the Federal Reserve. For details see [ID:nN16ST1]

“Expectations for more robust economic growth and attendant inflation seem to be the guiding themes in the bond market, which has pushed rates higher,” said Sharon Stark, chief fixed income strategist at Stern Agee in Birmingham, Alabama.

Investors are now keenly awaiting the January consumer price index on Thursday for any confirmation of climbing inflation. For an Analysis story on inflation click on [ID:nN15149987]. For a graphic on inflation click on: here

“Prices are starting to percolate at the lower levels of production, and that will push through to consumer prices later on this year,” said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.

Benchmark 10-year Treasury notes US10YT=RR were trading 3/32 lower in price to yield 3.63 percent, up from 3.61 percent late Tuesday.

Treasuries have been largely range bound for the past week after a dramatic run up in yields in early February as investors anticipated higher inflation on faster-than- previously expected economic improvement.

Ten-year yields remain off their recent highs of 3.77 percent set last week,

Benchmark yields briefly fell to 3.58 percent on Wednesday, the lowest level since Feb. 4, after Israel said two Iranian warships planned to sail through the Suez canal en route to Syria and called the move the latest “provocation” by Tehran. The minister hinted at an Israeli response. For more, see [ID:nLDE71F2BQ]

“We had a quick pop up on the Israeli story,” said Thomas Roth, executive director in U.S. government trading at Mitsubishi UFJ Securities USA in New York, adding “we’re not sure how to weigh this thing. We’ll have to wait and see.”

Treasuries briefly extended losses on Wednesday afternoon after minutes from the Federal Reserve’s policy meeting last month showed central bank officials had growing confidence in the U.S. economic recovery, although the pace was not fast enough to lower the jobless rate significantly. [ID:nWALGDE70Z]

In a busy day for Treasuries, data also showed U.S. industrial output unexpectedly fell in January, and U.S. housing starts rose by more than expected while permits for future home construction dropped unexpectedly.

The Federal Reserve on Wednesday bought $1.89 billion in debt maturing between 2021 and 2027 as part of its $600 billion quantitative easing program.

Two-year notes US2YT=RR were last trading 1/32 lower in price to yield 0.85 percent, up from 0.83 percent late Tuesday, while 30-year bonds US30YT=RR were 6/32 lower to yield 3.68 percent from 3.67 percent.

Additional reporting by Richard Leong, Ellen Freilich and Karen Brettell Editing by Theodore d'Afflisio

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