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Long-dated US Treasury bond prices slid on Wednesday as investors bet interest rate cuts from the Federal Reserve will stoke inflation despite signs that price increases actually moderated last month. The Fed slashed the benchmark federal funds rate by a half percentage point on Tuesday, a bigger reduction than many had expected.
The cut was welcomed by those who fear the economy may be descending into a serious downturn, but inflation hawks worried the central bank might let its guard down against price increases. Surging oil and gold prices added to those concerns.
Gains in the stock markets also lured investors away from government bonds.
The 30-year bond was down nearly 1-1/2 points in price as its yield rose to 4.84 percent, up 14 basis points in just two days. Bond yields move inversely to prices. As losses weighed disproportionately on longer maturities, the yield curve steepened.
"The reshaping of the curve is positioning for potential higher inflation," said Brian Robinson, bond strategist at 4Cast Ltd. Data published on Wednesday showed consumer prices excluding food and energy rose 0.2 percent in August, matching forecasts. This left the year-on-year reading at 2.1 percent, down slightly from July but still above the central bank's comfort range of 1-2 percent.
Against the backdrop of raging commodity costs, bond traders seemed to be gambling on an erosion in value for longer-term securities, pushing 10-year notes up 19/32 in price.
The maturity's yield jumped 7 basis points to 4.54 percent, the biggest one-day spike since credit conditions began deteriorating more severely. Housing starts figures showed no relief for the housing sector, which is at the epicentre of both the economy's slippage and the seizing up of credit markets. Groundbreaking on new homes fell 2.6 percent to their lowest level since 1995.

Copyright Reuters, 2007

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