US Treasuries soar as core inflation holds steady

US Treasury debt prices climbed on Tuesday after data showing large energy price increases during August had yet to filter through to other sectors of the economy.
Tame core inflation means the Federal Reserve need be in no rush to ratchet interest rates higher and leaves open some room for it to consider a pause in tightening monetary policy if Hurricane Katrina appears to have derailed economic growth.
Consumer confidence was already being affected by the storm's aftermath, with one measure of sentiment slumping to an all-time low in September.
That news gave bonds an added pop, boosting benchmark 10-year notes 11/32 for a yield of 4.13 percent, compared with 4.18 percent on Monday. Two-year notes also benefited, climbing 3/32 to yield 3.87 percent, down from 3.93 percent.
"In August there was little evidence of inflation outside of energy, something which should encourage the Fed," said Christopher Low, chief economist at FTN Financial. "Still, they can't help but wonder what prices will do after the storm, particularly for building materials."
Traders were having the same problem.
This week is packed with economic data, but much of it predates Katrina, which many economists believe might have considerably altered the national economic picture.
For that reason, two manufacturing reports from regional Federal Reserve Banks in New York and Philadelphia are unusually important, since they will offer the first insights on the post-hurricane environment.
In the meantime, investors were soothed by a flat reading of core producer prices for August, which followed a subdued 0.1 percent gain for July and fell short of forecasts of another 0.1 percent uptick.
The overall producer price index jumped 0.6 percent last month, also below estimates, leaving the annual rate of inflation up 5.1 percent, compared with 4.6 percent in July.
That soothed a bond market that has been afraid rampant energy price increases would begin permeating the economy as a whole, allowing five-year notes to march 8/32 higher to yield 3.93 percent, from 3.98 percent.
The 30-year bond rose 17/32 to yield 4.42 percent, down from 4.45 percent.
In another boost to bonds, Investor's Business Daily and TechnoMetrica Market Intelligence said their economic optimism index for September fell 9.7 points to an all-time low of 41.2 from August's 50.9. A reading below 50 indicates pessimism.