Treasuries down before PPI

LONDON: US Treasuries fell on Tuesday as signs China may be able to avoid a hard landing boosted equities at the expense of fixed income but the bonds should find relief from US data expected to come in weaker.

US Treasury bond prices fell across maturities, with the benchmark 10-year yield up 2.9 percent at 3.01 percent, as US stock futures pointed to a lower open on Wall Street and European stocks traded down.

Stock markets took their cue from higher equity markets in Asia where investors were relieved by signs China's red-hot economic growth was slowing, albeit not too quickly.

Chinese industrial production slowed and inflation data was broadly in line with expectations even though at its highest in 34 months. China's central bank later raised bank reserve ratios for the ninth time since last October.

"The market is relieved that the latest data suggests that China is headed for a soft landing which provided some relief for Asian stock markets and European equities," Nick Stamenkovic, bond strategist at RIA Capital Markets said.

The downside for Treasuries should however be limited if data later in the session confirms a soft patch in the world's largest economy after meagre US job growth numbers spooked the market recently.

US producer prices are expected to have slowed in May, growing only 0.1 percent on a monthly basis compared to 0.8 percent the month prior, according to a Reuters survey.

Investors are also bracing for retail sales shrinking by 0.4 percent in May after 0.5 percent expansion in April, another Reuters poll showed.

"People are looking for lower numbers showing that the economy is in trouble more or less or not robust at least," Craig Collins, trader at Bank of Montreal said. "That would be bond-friendly".

Downbeat data is only likely to make things more difficult for the Federal Reserve as the monetary authority nears the end of its bond-purchasing program.

It will raise questions about the effectiveness of an unpopular and extraordinarily easy monetary policy at a time when the United States' debt burden could cost it its triple-An investment grade status.

Copyright Reuters, 2011