US bonds up

US Treasury debt prices mostly gained on Wednesday after data showing a steep deterioration in industrial production and nary a whiff of inflation. Gains were limited, however, as strength in stocks ate away at the safe-haven appeal of government debt, while a New York state manufacturing report ignited some glimmers of hope that the economic downturn might be reaching a bottom.
Still, the industrial production numbers spurred worries the economy remains in deep trouble, and lent bonds some support. "These numbers are ugly. It's just a reflection of how bad this recession really is," said Jonathon Basile, economist at Credit Suisse in New York.
Benchmark 10-year Treasury notes traded 5/32 higher in price for a yield of 2.77 percent, down from 2.79 percent late on Tuesday, while two-year notes traded unchanged in price for a yield of 0.86 percent. The absence of Federal Reserve buying, a new staple of Treasury trading, also tempered the appetite for government debt. The Fed bought $7.3 billion in Treasuries on Tuesday, part of the central bank's effort to revive housing by keeping interest rates low.
Choppy trade in both equities and Treasuries reflected a broader underlying uncertainty about the fate of the economy. Credit markets seem to have stabilised and Fed Chairman Ben Bernanke has highlighted other signs of improvement. However, many wonder just how much of the mending is a direct product of the Fed and Treasury's hefty aid to the financial industry - and fear that the private sector is still not ready to rebound on its own.
"Without the massive government support, we don't know whether we've hit a bottom or if it's temporary," said Frank Hsu, director of global fixed income at Fimat in New York. These doubts are reflected clearly in the path of benchmark yields, which have been dithering in a range between 2.6 percent and 2.9 percent for nearly a month now.
Wednesday's economic reports did suggest contraction was still the prevailing force. US industrial output fell a sharp 1.5 percent in March, cratering at an annual rate of 20 percent in the first quarter.
However, a New York Fed manufacturing survey showed the region's manufacturing contraction had abated in April. Consumer price numbers confirmed a disinflationary trend, showing the first year-on-year decline since 1955. Analysts also found some glimmer of hope for the economy in data showing US homebuilder sentiment rose in April to its highest level since October. Five-year Treasury notes traded 3/32 higher in price for a yield of 1.71 percent from 1.73 percent late on Tuesday, while the 30-year bond traded 5/32 lower for a yield of 3.67 percent from 3.66 percent.