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Treasuries Fall Before Fed Releases Minutes of January Meeting

Feb. 16 (Bloomberg) -- Treasuries fell before The Federal Reserve releases minutes of its January meeting where policy makers voted to continue with the $600 billion debt-buying plan to bolster the economy.

Ten-year note erased earlier gains after Israel’s foreign minister called Iran’s plans to sail to gunboats through the Suez Canal a “provocation,” renewing the refuge appeal of U.S. debt. Government reports showed U.S. housing starts rose more than forecast in January and wholesale prices increased for a seventh straight month, fueling speculation that economic growth and inflation are accelerating.

“The fundamentals look good, and are bearish for Treasuries, but the market can’t ignore geopolitical risk like this,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 20 primary dealers that trade with the Fed. “The concern is that there may be more escalation in the Middle East, which is never something the market likes to see.”

Yields on U.S. 10-year notes rose two basis points to 3.53 percent at 1:10 p.m. in New York, according to BGCantor Market Data, the lowest since Feb. 4. The price of the 3.625 percent security maturing in February 2021 decreased 6/32, or $1.88 per $1,000 face amount, to 99 30/32.

Two-year note yields gained two basis points to 0.84 percent after touching 0.88 percent yesterday, the highest level since May 13.

Mideast Tension

Israeli Foreign Minister Avigdor Lieberman said in a speech today that two Iranian gunboats are planning to sail tonight to Syria through Egypt’s Suez canal.

Lieberman called the move a “provocation” and said that Iranian war boats had not sailed through the canal for “many years.” Lieberman’s comments were sent by his office in an e-mailed statement.

The Suez Canal Authority’s head of traffic Ahmed El Manakhly said that no Iranian gunboats have passed through the canal today.

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.

The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices over the life of the securities, was little changed at 2.292 percent today. It hit a 15-month low of 1.47 percent in August.

Wholesale Prices

The producer price index rose 0.8 percent in January, 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.”

Consumer prices may have increased 0.3 percent in January after a revised 0.4 percent gain in December, according to the median of a survey of 79 economists by Bloomberg News. Core inflation, excluding food and energy, rose 0.9 percent on an annual basis, the survey found.

Industrial production fell 0.1 percent in January after a 1.2 percent increase in December that was larger than initially reported, figures from the Federal Reserve showed today. Utilities and mining fell, while manufacturing, which makes up 75 percent of the total, rose 0.3 percent. Economists had forecast a 0.5 percent gain in overall production, according to the median estimate in a Bloomberg News survey.

Building Trends

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.

“The morning’s data was bearish for the Treasury market, though we are not selling off as much as one would expect,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The bearish momentum has run its course to some extent and the market is consolidating and looking for motivation to break out in one direction or the other.”

Treasuries have handed investors a loss of 1.1 percent this year, compared with a gain of 5.9 percent last year, according to Bank of America Merrill Lynch data.

The Fed bought $1.9 billion to of Treasuries maturing from May 2021 to November 2027 today as part of its $600 billion plan to bolster the economy.

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

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

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