US Treasuries resistant to surge in producer prices

US Treasury debt prices rose on Tuesday, weathering a jump in wholesale inflation as investors appeared to determine that nearly two months of selling had taken yields high enough for now.
Data on producer prices showed both the headline figure and the measure excluding food and energy surpassed forecasts, indicating that the Federal Reserve would have to continue raising interest rates for the foreseeable future.
Janet Yellen, president of the San Francisco Fed, signalled as much on Tuesday, arguing in a speech that the central bank must be vigilant against inflation or risk a 1970s-like upward price spiral.
But even with the threat of higher rates looming, benchmark yields withstood early selling and found solid technical support around 4.50 percent.
Failing to convincingly break that level, ten-year notes turned around and edged 4/32 higher for a yield of 4.48 percent, down from 4.50 percent at Monday's close. Two-year notes climbed 1/32 and were yielding 4.26 percent from 4.27 percent.
"PPI today was higher than expected but is easily explained away as oil prices and gas prices have come down since the hurricanes," said Andrew Brenner, head fixed-income at Investec US
Investors were also relieved that Federal Reserve Chief Alan Greenspan, speaking late on Monday, highlighted the potentially detrimental effect of high energy prices on economic growth, rather than its inflationary potential.
This marked a striking shift from recent Fed rhetoric focusing on worries that prices might be rising more rapidly than the central bank would like.
Five-year notes added 3/32 to yield 4.34 percent down from 4.36 percent, while the 30-year bond added 8/32 for a yield of 4.70 percent.
Still, some analysts warned that bulls need not go racing out of their pens just yet, since the central bank has made clear enough that it intends to keep tightening monetary policy for now.
"The market is still very muted because we know the Fed is going to err on the side of fighting inflation," said Gerald Lucas, chief Treasury strategist at Banc of America Securities.
And there was plenty of inflation for the Fed to fight. US producer prices shot up by an surprisingly large 1.9 percent last month, the biggest gain in more than 15 years, as energy costs surged in the wake of hurricanes that devastated the US Gulf Coast.