Treasuries Show Lack Of Direction Before Closing Nearly Flat


Treasuries showed a lack of direction over the course of the trading session on Wednesday following the steep drop seen in the previous session.

Bond prices rebounded after seeing initial weakness but pulled back near the unchanged line as the day progressed. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, inched up by less than a basis point to 1.301 percent.

The ten-year yield ended the day well off its intraday high of 1.331 percent but still closed above 1.3 percent for the first time in almost a year.

Treasuries initially came under pressure following the release of a report from the Commerce Department showing retail sales rebounded by much more than anticipated in the month of January.

The Commerce Department said retail sales spiked by 5.3 percent in January after sliding by a revised 1.0 percent in December.

Economists had expected retail sales to jump by 1.1 percent compared to the 0.7 percent decrease originally reported for the previous month.

Excluding sales by motor vehicle and parts retailers, retail sales soared by 5.9 percent in January after tumbling by a revised 1.8 percent in December.

Economists had expected ex-auto sales to increase by 1.0 percent compared to the 1.4 percent slump originally reported for the previous month.

Selling pressure waned over the course of the morning, however, as traders shrugged off concerns about inflation despite a Labor Department showed a jump in producer prices.

The Labor Department said its producer price index for final demand surged up by 1.3 percent in January after rising by 0.3 percent in December. Economists had expected producer prices to increase by 0.4 percent.

Excluding food and energy prices, core producer prices still shot up by 1.2 percent in January after inching up by 0.1 percent in December. Core prices were expected to edge up by 0.2 percent.

The report also showed the annual rate of producer price growth soared to 1.7 percent in January from 0.8 percent in December.

Core producer prices were up by 2.0 percent year-over-year in January, reflecting a notable acceleration from the 1.2 percent increase seen in the previous month.

“The modest year-on-year increases, despite big month-on-month increases, suggest this is reflation, not inflation,” said Chris Low, Chief Economist at FHN Financial. “That is, prices are rising after falling earlier.”

“Some further increases in the PPI are likely given commodity price behavior in recent weeks,” he added. “These will boost the PPI and – to a much lesser extent – the CPI in the months ahead.”

Treasuries pulled back near the unchanged line following the release of the results of the Treasury Department’s auction of $27 billion worth of twenty-year bonds, which attracted below average demand.

The twenty-year bond auction drew a high yield of 1.920 percent and a bid-to-cover ratio of 2.15, while the nine previous twenty-year bond auctions had an average bid-to-cover ratio of 2.40.

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

Meanwhile, traders largely shrugged off the minutes of the Federal Reserve’s latest monetary policy meeting, which reiterated the central bank is not likely to make any policy changes anytime soon.

Trading on Thursday may be impacted by another batch of U.S. economic data, including reports on initial jobless claims, housing starts, import and export prices and Philadelphia-area manufacturing activity.


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