Treasuries Decline as Housing Starts, Wholesale Prices Rise

Treasuries Fell after data showed U.S. housing starts rose more than forecast in January and wholesale prices increased for a seventh straight month.

Ten-year note yields remained higher after the U.S. industrial production unexpectedly declined in January, dragged down by a decline in utilities as milder temperatures curbed demand for heating. The Federal Reserve releases minutes of its January policy meeting today and the central bank is scheduled to buy $1.5 billion to $2.5 billion of Treasuries maturing from May 2021 to November 2027 today.

“The PPI data this morning was a little hotter than expected, which is renewing inflationary concerns,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “Any data that corroborates a higher inflation story means weakness for the Treasury market.”

Yields on U.S. 10-year notes rose one basis point to 3.62 percent at 9:27 a.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent security maturing in February 2021 decreased 3/32, or 94 cents per $1,000 face amount, to 100 2/32.

Yield Swings

Two-year note yields rose threebasis point to 0.84 percent after touching 0.88 percent yesterday, the highest level since May 13.

Yields on 10-year notes have risen in each of the past five months, the longest stretch of monthly increases since 2006, on evidence the U.S. recovery is gaining momentum.

Builders began work on more homes than forecast in January, reflecting a surge in multifamily units that may signal a turnaround in the rental market.

Housing starts climbed 15 percent to a 596,000 annual rate, the most this year, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for a 539,000 rate. Work started on 78 percent more dwellings with two or more units, overshadowing a drop in single-family houses that indicates the housing market continues to struggle.

Wholesale costs in the U.S. increased for a seventh consecutive month in January, led by higher prices for fuel.

PPI Trends

The producer price index rose 0.8 percent, Labor Department figures showed today in Washington. The figure matched the median forecast in a Bloomberg News survey. The so-called core measure, which excludes volatile food and energy costs, rose 0.5 percent, the biggest rise since October 2008.

“The fear of inflation may be a little bit more real than people had thought,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “You are running the risk that inflation is starting to creep up on us and that’s bad for fixed-income.”

Bank of England Governor Mervyn King predicted at a press conference in London today that the U.K.’s inflation will fall back toward the central bank’s 2 percent target by 2012 and below it within two years. The central bank hasn’t laid the groundwork for an increase in the 0.5 percent main rate, according to King.

“There is no inflation panic within the Bank of England, and this is good for bonds,” said Kornelius Purps, a fixed- income strategist at UniCredit SpA in Munich. “In the absence of U.S. input this morning, the Treasury market is reacting to what is going on in Europe.”

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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