Treasuries Advance After U.S. Producer Prices Unexpectedly Fall

Treasuries rose for the first time in three days after the U.S. producer price index unexpectedly declined before the Federal Reserve considers next week when to reduce bond purchases.

Benchmark 10-year note yields fell from a one-week high. Yields rose yesterday after a larger-than-forecast jump in retail sales in November added to speculation the Fed, which meets Dec. 17-18, will slow stimulus as the world’s biggest economy improves. Producer prices fell 0.1 percent in November, the Labor Department said, adding to data showing little impetus toward higher prices.

“We know that’s not the Fed’s preferred measure of inflation, but the Fed’s preferred measure of inflation is extremely low also,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “This lends more to the argument that if the inflation portion of their dual mandate is nowhere near their goal, until it’s near their goal how can they tighten policy?”

The 10-year yield fell one basis point, or 0.01 percentage point, to 2.87 percent at 9:43 a.m. in New York, according to Bloomberg Bond Trader data. The yield touched 2.89 percent earlier, the highest since Dec. 6. The price of the 2.75 percent security maturing November 2023 rose 3/32, or 94 cents per $1,000 face amount to 99.

The benchmark yields are rising for a fourth straight week, the longest losing streak since June, amid speculation Fed policy makers will soon reduce stimulus. Yesterday’s retail-sales report followed other data this month showing gains in employment and manufacturing. The central bank’s mission is to ensure full employment and price stability.

Taper Bets

The Federal Open Market Committee will start slowing $85 billion in monthly bond purchases at its meeting next week, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent in a November survey. Others predicted tapering will start next year.

Minutes of the Fed’s Oct. 29-30 meeting, released Nov. 20, showed policy makers expected economic data to indicate improvement in the labor market and “warrant trimming the pace of purchases in coming months.”

Producer prices declined for a third month in November, reflecting lower costs for energy and cars. The 0.1 percent drop in the measure of wholesale costs followed a 0.2 percent decrease the prior month, the Labor Department report showed. The median estimate in a Bloomberg survey called for no change. The so-called core measure, which excludes food and energy, rose 0.1 percent.

Personal Consumption

The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, showed price gains slowed to 0.7 percent in October, the least since 2009. The gauge has failed to meet the Fed’s 2 percent target for 18 months.

The central bank has kept its benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy. Fed Chairman Ben S. Bernanke said last month the rate will probably stay low long after bond buying ends.

The Treasury will sell $32 billion in two-year notes on Dec. 17, $35 billion in five-year securities the following day and $29 billion of seven-year debt on Dec. 19. It will also auction $16 billion in five-year inflation-protected securities on Dec. 19.

Treasuries fell earlier this week amid speculation a budget accord announced by congressional negotiators would improve the economy and ease the way for the Fed to reduce stimulus.

The House passed the first bipartisan federal budget in four years late yesterday in Washington, aiming to ease $63 billion in automatic spending cuts and avert another government shutdown. The legislation now heads to the Senate.

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