TREASURIES-Bond market bets on inflation after Fed, CPI input

* Inflation is low now, but likely to rise with Fed focus

* Bernanke’s speech seen as supportive to QE expectations

* 30-year down over a point as traders bet on QE results

By Emily Flitter

NEW YORK, Oct 15 (BestGrowthStock) – The prices of longer-dated
U.S. Treasury securities fell and yields rose on Friday after
weak consumer price data and a speech by Federal Reserve
Chairman Ben Bernanke led traders to believe the U.S. central
bank would try to create inflation.

This meant it was less beneficial to hold 30-year Treasury
bonds and even 10-year notes at current low yields, since
future inflation would drive interest rates higher.

“Ironically today we got very benign inflation data with
the core CPI unchanged,” said Rich Bryant, head of Treasury
trading at MF Global in New York.

“Normally this would bode well for the long end but I think
it’s actually contributing to weakness in the long end because
the Fed is very focused on inflation.”

Traders sold their long bonds and 10-year notes after
Bernanke’s speech, delivered to a conference in Boston,
conveyed a focus on inflation targets. For more, click on
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Data on consumer prices showed a smaller-than-expected rise
in September, adding weight to the idea that the Fed would turn
its attention to stimulating economic growth and inflation.
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This will most likely entail a new Treasury purchase
program by the Fed, something Treasury traders have been
anticipating for weeks.

“If you look at it, he didn’t try to dial back the market’s
expectations,” said Scott Sherman, interest-rate strategist at
Credit Suisse in New York. “I think that Bernanke’s statement
is really consistent with how I would expect him to approach
this if he was leaning toward doing further easing.”

The 30-year bond (US30YT=RR: ) traded 1-10/32 lower in price
to yield 4 percent, up from 3.92 percent late on Thursday.

Behavior in the market for Treasury Inflation-Protected
Securities also supported the idea that the sell-off was based
on inflation expectations.

The spread between the yields on U.S. 10-year TIPS and
regular 10-year Treasury notes reached 2.14 percent, its widest
in nearly 5 months. On Aug 24, the spread, which is a market
gauge of inflation expectations, was 1.50 percent.

Benchmark 10-year Treasury notes (US10YT=RR: ) last traded
11/32 lower in price to yield 2.55 percent, up from 2.51
percent late on Thursday.

Treasury notes with shorter maturities rose slightly in
price. Three-year notes (US3YT=RR: ) traded 3/32 higher in price
to yield 0.59 percent, down from 0.62 percent late on
Thursday.

(Additional reporting by Richard Leong, Editing by Chizu
Nomiyama)

TREASURIES-Bond market bets on inflation after Fed, CPI input