New York market: Treasury investors braced for bad news

INVESTORS in the $3,200bn (pounds 1,970bn) US treasury market are braced for bad news, even though they've had their share of good tidings lately. A report on Friday showing producer prices were unchanged in November excluding food and energy -- a sign of tame inflation that would typically spark a frenzy of buying - prompted only moderate gains in government debt.

"The market is fearful that the worst is yet to come and an occasional good number like this has a muted impact," said Greg Habeeb, bond manager at the Calvert Group. "Things could change." US 30-year bonds yields fell 5 basis points to 6.16 per cent. By contrast, a similar report in August sparked a rally that sent bonds up almost 11/4 points.

It was the same story earlier in the month, when figures showing subdued wage gains last month and the biggest gains in productivity in seven years in the third quarter, failed to produce more than one-day spurts.

It's not enough for bond investors to know that inflation and the ingredients that typically goad it along - such as rising job costs - are behaving themselves now, even with the economy's strength. They want assurance that inflation, which eats into the value of a bond's fixed payments, isn't poised to spiral higher before turning bullish on Treasuries. With the economy poised to break a record run, the jobless rate at a 30-year low, and surging US stocks fuelling consumer spending, that assurance is hard to come by. Investors probably won't get much comfort from this week's consumer price report, either, even if it shows inflation isn't quickening too much.

The Federal Reserve has already raised its target for overnight lending between banks three times since June in order to curb growth before it results in higher prices on goods and services. Fed officials have hinted they may raise interest rates again on signs of further tightness in the jobs market. This might lead to higher wages that could spur inflation. "I would err on the side of caution," said Kirk Hartman, at Bank of America Investment Management in Los Angeles.