Houston's Rate Sheet

Producer Prices and Housing Starts contribute to lower yields

The Producer Price Index came in lower than expected today, and bond investors reacted positively. They pushed down the yield on the benchmark 10-year Treasury 1 basis point to 4.99 percent. Nothing to get too excited about, but it is definitely better than the alternative. Let's hope we have similar to better results in tomorrow's Consumer Price Index.

Also, contributing to the decline was the New Housing Starts release. New Housing starts fell 7.8 percent in March.

For further detail on today's events, here's a report excerpt from Reuter's:

NEW YORK, April 18 (Reuters) - U.S. Treasury debt prices rose on Tuesday after milder-than-expected inflation data and a weak housing construction reading trimmed expectations of two more Federal Reserve rate increases by mid-year.

Benchmark 10-year Treasury notes up 6/32 in price and their yield fell below key 5 percent level to 4.99 percent after the government's latest reports on U.S. producer price index and housing starts. [ID:nN18340795]

A softer-than-expected 0.1 advance in the core PPI, which strips out volatile food ane energy prices, soothed worries that high energy costs have seeped into the broader economy, which could warrant more rate increases by the Fed.

"Today's PPI report clearly tells us the higher oil price is not inflationary. The Fed has little reason to continue raising rates, especially in view of a serious downturn in the housing market," said Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey City, New York.

U.S. crude futures on Tuesday climbed to $70.88 a barrel, smashing through its previous record of $70.85.

Reacting to the economic data, U.S. short-term rate futures have fully priced a quarter percentage interest rate increase at the Fed's May policy meeting , but the likelihood that the Fed will lift rates again at its June meeting slipped to 44 percent from 54 percent on Monday.

The U.S. housing market, which had been a driver of economic growth, showed more weakness. The Commerce Department said March housing starts fell 7.8 percent to an annualized rate of 1.960 million units, below the forecast 2.030 million rate. Housing starts also fell 7.8 percent in February.

"Higher mortgage rates are having the expected impact on the housing market," said Anthony Chan, chief economist at J.P. Morgan Private Client Services in Columbus, Ohio.

Two-year note yields were at 4.87 percent, down from 4.90 percent late Monday. Five-year notes were up 5/32 in price to yield 4.89 percent, down from 4.92 percent. The long bond rose 6/32 for a yield of 5.07 percent, down from 5.08 percent......

posted by Vincent Biondillo @ 11:36 AM