With the Treasury's quarterly refunding out of the way, the bond market will return its attention this week to economic statistics, focusing in particular on October's inflation data.
Both the October producer price report tomorrow and the October consumer prices Thursday are expected to be favorable for the bond market and should help the market maintain the bullish tone it regained late last week.
Economists surveyed by The Bond Buyer on average expect last month's wholesale prices to rise only 0.1% and said the core rate, minus food and energy prices, will also rise 0.1%.
In September, producer prices rose 0.1% and the core rate was flat.
According to the survey, consumer prices will show a 0.2% increase. And the close wathced core rate of consumer prices, excluding food and energy costs, will increase 0.3%.
That core rate would come as a relief to the market, since the measure has posted a 0.4% gain for each of the last four months.
Continued improvement in inflation rates is one of the main factors contributing to the bond market's optimistic outlook. Traders and analysts believe the economy's lethargy will continue to put downward pressures on prices.
But some economists point out that much of the improvement seen in recent months in the overall rates of producer and consumer prices reflects the sharp decline in oil prices after an initial run-up in the early months of the Persian Gulf conflict.
Gary Schlossberg, a senior economist at Wells Fargo, said that
Treasury Market Yields
Monday Week Month
3-Month Bill NA 4.84 NA
6-Month Bill NA 4.95 NA
1-Year Bill NA 4.99 NA
2-Year Note 5.64 5.62 5.86
3-Year Note 5.95 5.91 6.12
4-Year Note 6.04 6.05 6.30
5-Year Note 6.64 6.72 6.80
7-Year Note 7.03 7.15 7.16
10-Year Note 7.40 7.48 7.45
15-Year Bond 7.69 7.79 7.72
30-Year Bond 7.86 8.02 7.87
Source: Cantor, Fitzgerald/Telerate
while the overall consumer price index is up only 3.5% on a year-over-year basis, the underlying increase, excluding food and energy costs, is more than 4.5%.
"The point is if oil prices or food prices stabilize, the [overall] rate could quickly move bak to the underlying rate," Mr. Schlossberg said.
"The underlying rate should improve given the weakness in the economy, but I think that improvement may be a bit more limited than we usually see in the early stages of a recovery," he said.
Mr. Schlossberg said if the economy only picks up modestly, the usual gains in productivity will be minimized.
Robin Marshall, chief economist at Chase Securities in London, said he was worried about whether inflation can continue to improve if the Federal Reserve keeps easing policy aggressively. The Fed has eased twice in the last two weeks.
"The recent behavior of the Fed suggests it is leaning quite hard against this disinflation trend by easing policy so steadily," Mr. Marshall shall said. "I wonder whether these [inflation] numbers now might be some of the best numbers we see for a while.
"A lot also depends on whether the fiscal can of worms is opened," he added. "If we see tax cuts during the first half of next year, when the economy is beginning to recover, I suspect that is going to result in badly deteriorating inflation numbers in the second half of next year."
The cash Treasury market was closed in the United States yesterday in honor of Veterans' Day, but long-term prices made small gains in overseas trading as investors continued to extend the maturity of their holdings.
At the close of the London session, the when-issued 30-year bond was up 1/8 to yield 7.86%.
London dealers said the gains at the long end occured in thin trading and reflected buying related to a 10-year interest-rate swap and more extension trades.
"The trading community as well as some retail investors are extending out the curve a bit," a London trader said. "The focus of the week will be the inflation news Wednesday and Thursday, and I guess there's some sense the news will be better."
Futures contracts on Treasury securities traded for a half a day in Chicago, and the December bond futures contract closed 5/32 higher, at 100 14/32.
In when-issued trading, the 30-year 8% bond was 5/32 higher, at 101 15/32-101 19/32, to yield 7.86%.
The when-issued 7 1/2% 10-year note rose 3/32, to 100 18/32-100 22/32, to yield 7.40%.
The when-issued three-year 6% note was unchanged, at 100 22/32-100 4/32, to yield 5.95%.