May 14, 2014 / 1:30 PM / 4 years ago

TREASURIES-Yields fall to six-month lows, ECB rate cuts expected

* Benchmark 10-year note yields lowest since November
    * Government debt rallies on ECB rate cut expectations
    * Fed to buy $350 mln - $600 mln bonds due 2024-2031
    * Treasuries hold rally even as US producer prices gain

    By Karen Brettell
    NEW YORK, May 14 (Reuters) - U.S. Treasuries yields fell to
six-month lows on Wednesday, with prices rallying with German
government bonds on expectations the European Central Bank will
cut interest rates in June as the region grapples with low
inflation, even as U.S. producer price data showed solid gains.
    The ECB is preparing a package of policy options for its
June meeting, including cuts in all its interest rates and
targeted measures aimed at boosting lending to small- and
mid-sized firms (SMEs). 
    A dovish ECB has helped hold down yields on German and U.S.
government debt. The bonds often move in a correlated fashion
even though the U.S. is seen as posed for stronger growth than
Europe, which many expect will eventually send Treasuries yields
    "The only reason that the Treasury market is bid this
morning is a series of shifting expectations for European
monetary policy," said Ian Lyngen, a senior government bond
strategist at CRT Capital in Stamford, Connecticut.
    Weak European economic data added to the bid for government
    Euro zone industrial output unexpectedly fell in March on
the year for the first time since August as energy production
slumped, data showed on Wednesday, in what could point to slower
economic growth going into the second quarter. 
    The Bundesbank is also ready to support European Central
Bank policy action if it is needed and this is not new, two
Bundesbank sources said on Tuesday. 
    "It reinforces the notion that from a global perspective
monetary policy is forward committed to lower for longer,"
Lyngen said.
    Benchmark 10-year Treasuries gained 9/32 in
price to yield 2.581 percent, after earlier falling to a
six-month low of 2.568 percent. The notes have held in a tight
range since January, with yields oscillating between 2.57
percent and 2.82 percent as investors analyze data for signs of
when the Federal Reserve is likely to begin raising rates, which
many expect next year.
    Thirty-year bonds gained a point in price to
yield 3.395 percent, down from 3.454 percent late on Tuesday.
    U.S. Treasuries held onto overnight gains on Wednesday even
after data showed that U.S. producer prices posted their largest
increase in 1-1/2 years in April as the cost of food and trade
services surged.
    The Labor Department said on Wednesday its seasonally
adjusted producer price index for final demand rose 0.6 percent,
the biggest gain since September 2012. Producer prices increased
0.5 percent in March. 
    The next focus of attention will be the Consumer Price Index
for April on Thursday, which will be watched for signs that
price pressures are increasing.
    Low inflation is seen as complicating the Fed's ability to
raise interest rates unless there are signs that inflation will
rise back to the Fed's 2 percent target.
    The Fed will purchase between $350 million and $600 million
in notes due from 2024 to 2031 on Wednesday as part of its
ongoing purchase program.

 (Editing by Chizu Nomiyama)
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