US Treasury debt prices slipped on Wednesday although yields held within recent ranges as some fears of rising inflation were tempered by a drop in industrial production. Trade was choppy, with bonds rising in price late in the morning after comments by Israel's foreign minister about Iranian warships sparked a safety bid and briefly pushed benchmark yields to the lowest in over a week.
The safe-haven interest wore off however early in the afternoon. Early in the day the government said US core producer prices in January rose at the highest rate in more than two years, raising fears about a build-up in inflation as the recovery gathers pace, which would be a potentially troubling development for the Federal Reserve.
"Expectations for more robust economic growth and attendant inflation seem to be the guiding themes in the bond market, which has pushed rates higher," said Sharon Stark, chief fixed income strategist at Stern Agee in Birmingham, Alabama. Benchmark 10-year Treasury notes were trading 3/32 lower in price to yield 3.63 percent, up from 3.61 percent late Tuesday.
Treasuries have been largely range bound for the past week after a dramatic run up in yields in early February as investors anticipated higher inflation on faster-than- previously expected economic improvement. Ten-year yields remain off their recent highs of 3.77 percent set last week, Benchmark yields briefly fell to 3.58 percent on Wednesday, the lowest level since February 4, after Israel said two Iranian warships planned to sail through the Suez canal en route to Syria and called the move the latest "provocation" by Tehran. The minister hinted at an Israeli response.
Treasuries briefly extended losses on Wednesday afternoon after minutes from the Federal Reserve's policy meeting last month showed central bank officials had growing confidence in the US economic recovery, although the pace was not fast enough to lower the jobless rate significantly.
In a busy day for Treasuries, data also showed US industrial output unexpectedly fell in January, and US housing starts rose by more than expected while permits for future home construction dropped unexpectedly. The Federal Reserve on Wednesday bought $1.89 billion in debt maturing between 2021 and 2027 as part of its $600 billion quantitative easing program. Two-year notes were last trading 1/32 lower in price to yield 0.85 percent, up from 0.83 percent late Tuesday, while 30-year bonds were 6/32 lower to yield 3.68 percent from 3.67 percent.