US bonds choppy on economy, inflation data

NEW YORK: US Treasury prices were little changed on Wednesday in light, choppy trading as investors grappled with the prospect of a weakening economy and rising producer prices raised some fears that inflation may be on the rise.

US government bond prices have rallied as economists and Federal Reserve officials downgrade expectations for economic growth and some speculate the central bank will again need to intervene in the market in a bid to spur growth.

Data on Wednesday that showed that US core producer prices rose at their fastest pace in six months in July also added to some concern that inflation may further hurt economic growth.

"It's a buy-on-dips mentality based on the recent downgrades in GDP and whether we are going to continue to decline," said Jim Golden, head of Treasury trading at Jefferies & Co in New York.

Investors will be watching for indications of further monetary easing when Fed Chairman Ben Bernanke speaks at the central bank's Aug. 26 Jackson Hole, Wyoming conference.

"Part of the stabilization in the equity market is that there is some expectation that there is going to be something coming out of those meetings," said Alan De Rose, head trader of government trading and finance at Oppenheimer & Co in New York.

Rising inflation data, however, adds a wild card to any possible Fed plans, especially as the US central bank members are increasingly divided over monetary policy.

Three officials last week voted against the Fed's policy to keep rates on hold for at least another two years.

Further confirmation of rising prices would make it more difficult for the Fed to pursue further stimulus.

"With three dissenters and inflation rising ... that is probably going to weigh a little bit in the equity market and provide (Treasuries) with a little bit of a better bid," said De Rose.

Benchmark 10-year notes were last down 2/32 in price to yield 2.23 percent, little changed from Tuesday.

Thirty-year bonds gained 3/32 in price to yield 3.66 percent, down from 3.67 percent late on Tuesday.

The breakeven rates on short-term and medium-term US Treasury Inflation-Protected Securities trimmed their earlier losses on the producer price rise.

The yield gap between 10-year TIPS and regular 10-year Treasuries, a measure of investors' inflation expectations, was last quoted at 2.21 percent, down 0.2 basis point versus a 0.5 basis-point decline prior to the release of the PPI data.

Copyright Reuters, 2011