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Treasury Bond Prices Rally

MARKETSCOPE : Treasury bond prices rallied on Tuesday, after comments from Federal Reserve chairman nominee Ben Bernanke offset an unexpected decline in the October core Producer Price Index.

The 10-year note climbed 13/32 to 99-18/32 for a yield of 4.55%, while the 30-year bond jumped 26/32 to 109-09/32 for a yield of 4.74%.

Federal Reserve chairman nominee Ben Bernanke told the Senate Banking Committee Tuesday that he would strive to maintain the independence of the Fed. Bernanke said his top priority is continuity of current Federal Reserve Chairman Alan Greenspan's policies, and over the long run price stability is essential. He said inflation targeting will have several advantages, including increased transparency. However, he said adopting such a policy needs further study.

"Bernanke's comments are consistent with a steady series of 25 basis point Fed hikes at each of the next Fed meetings through to mid-2006," said Monica Fan, of RBC Capital Markets in London. RBC economists expect the peak in the Fed funds rate could be as high as 5.25%. The Fed has already raised rates 12 times since 2004 in an effort to keep inflation in check.

In answer to a hypothetical inflation question, Bernanke suggested he is not too concerned with month-to-month or quarter-to-quarter gyrations, but he would be more focused on keeping longer run inflation and inflation expectations contained. He would ensure the markets that over a longer period of time the Fed would work to contain price pressures, with Fed credibility helping in that regard.

These factors offset news that the October Producer Price Index, excluding food and energy, fell unexpectedly by 0.3%. November retail sales fell 0.1% vs. an expected 0.5% to 0.7% decline. The November New York Fed index rose to 22.82 from 12.08 in October, better than expected. The headline Produce Price Index rose 0.7%.

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