Treasurys Gain on Benign CPI Data (Wall Street Journal)

BY WANFENG ZHOU
May 15, 2007 1:24 p.m.

Treasury prices rose Tuesday, driving yields lower, after a government report showed U.S. consumer prices rose less than expected last month.

The benchmark 10-year Treasury note was last up 4/32, or $1.25 per $1,000 invested, at 98 18/32 with a yield of 4.683%. The 30-year Treasury bond was up 8/32 to 98 12/32 to yield 4.854%. The two-year note was flat at 99 18/32 with a 4.731% yield. Prices and yields move inversely.

The moderate core inflation in April could take some pressure off the Federal Reserve to raise interest rates. But at its meeting last week, Fed officials looked past the benign core inflation figures for March, and said inflationary pressures are elevated and remain the greatest risk to a stable economy.

"The market seems relieved at the absence of a feared CPI core overshoot," said Mike Englund, chief economist at research firm Action Economics.

U.S. consumer prices increased 0.4% in April, boosted by increases for energy and groceries, the Labor Department said Tuesday. Economists surveyed by MarketWatch had expected a 0.5% gain.

Excluding food and energy, the core consumer price index rose 0.2%, as expected, cutting the annual gain in the core down to a one-year low of 2.3%.

The fixed-income market abhors inflation because it eats into the investment return of bonds.

Daniel Jester, economist at Moody's Economy.com, said "today's report continues a string of good inflation reports which have shown moderating core price pressure since the start of the year."

That said, "the sharp gains in food, and more importantly, energy prices in the past three months -- both more robust than was experienced this time last year -- will keep the Fed on guard about the risk of potential price pass-through," he said.

This could eventually temper the deceleration in core inflation later this year, especially if the economy begins to reaccelerate," he said. "As such, we are still comfortable with the Fed remaining on the sidelines for the duration of 2007, so long as fallout from the housing recession proceeds as expected."

Separately, the Federal Reserve Bank of New York said its Empire State Manufacturing index rose to 8.0 in May from 3.8 in April. Readings over zero indicate expansion.

This is the highest level of the index since February, and was in line with expectations of Wall Street economists.

Also on Tuesday, the Treasury Department said foreign purchases of long-term U.S. securities jumped in March, led by private investors' purchases of Treasury bonds and notes as well as by official institutions buying government agency bonds.

Net foreign purchases of long-term securities rose to $107.9 billion in the month, up from February's $77.9 billion. Private investors boosted the March total by buying $30.7 billion in Treasury bonds and notes, more than double the amount purchased in February.

At 1 p.m. Eastern time, the National Association of Home Builders and Wells Fargo will released the housing market index for May.