NEW YORK: US Treasuries prices rose on Wednesday as US 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 June.
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.
US 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 low levels.
"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," said Pond.
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 US 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 purchase program.
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