Treasuries Move Higher On Unexpected Drop In Producer Prices

(RTTNews) - After turning lower over the course of the previous session, treasuries moved back to the upside during trading on Thursday.

Bond prices moved higher in early trading and remained firmly in positive territory throughout the session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 4.3 basis points to 2.239 percent.

With the drop on the day, the ten-year yield gave back some ground after ending Wednesday's trading at its highest closing level in over five months.

Treasuries benefited from a positive reaction to a report from the Labor Department showing an unexpected drop in U.S. producer prices in the month of April.

The Labor Department said its producer price index for final demand fell by 0.4 percent in April after edging up by 0.2 percent in March. The index had been expected to show another 0.2 percent increase.

Excluding food and energy prices, core producer prices dipped by 0.2 percent in April following a 0.2 percent increase in the previous month. Economists had expected core prices to inch up by 0.1 percent.

Combined with the recent disappointing retail sales data, the drop in prices further reinforces the view that the Federal Reserve will delay its planned increase in interest rates.

Jay Morelock, an economist at FTN Financial, said, "As the Fed continues to signal monetary tightening as the rest of the developed world's central banks remain accommodative, currency movements act as a premature tightening, bringing down inflation before the Fed actually does anything."

"Given recent price data on both a producer and consumer level, the Fed will find it hard to explain its concerns about wage inflation when current price measures remain on a downward trajectory," he added.

Meanwhile, traders largely shrugged off the results of the Treasury Department's auction of $16 billion worth of thirty-year bonds, which attracted below average demand.

The thirty-year bond auction drew a high yield of 3.044 percent and a bid-to-cover ratio of 2.20, while the ten previous thirty-year bond auctions had an average bid-to-cover ratio of 2.41.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Another batch of economic data may attract attention on Friday, with traders likely to keep an eye on reports on New York manufacturing activity, industrial production, and consumer sentiment.