US Treasury debt prices were little changed on Tuesday but only after surprisingly strong housing data wiped out most earlier gains and injected caution into the market before key releases on Wednesday.
A report showing US home-builder sentiment climbed in October after slumping for eight straight months to a 15-year low eroded an initial rise in government bond prices that had been driven by soft industrial production and benign producer price figures.
In late US trade, benchmark 10-year notes were holding 2/32 higher on the day, yielding 4.77 percent, versus 4.78 percent on Monday. Gains earlier had pushed the yield down to 4.732 percent before traders sought to square positions ahead of reports on the Consumer Price Index and housing starts on Wednesday.
"I think what this is showing you is that housing may be weaker than it has been in quite a while, but it's not leading to a recession," said Ted Ake, executive director and head of bond trading at Mizuho Securities in New York.
"We've got a bunch more economic data tomorrow, including CPI, which will be a big number, and then we've also got housing starts tomorrow and this home-builders' survey might be an indication that housing starts may not be as weak as everybody was worried about."
Bonds were helped earlier in the day by data showing US government debt remained in favour with foreign investors, who bought Treasuries in August at the fastest pace in over a year.
The overall US Producer Price Index fell 1.3 percent in September, the sharpest fall since April 2003, due to a record drop in gasoline costs, the Labour Department said. Core PPI, which excludes food and energy, rose 0.6 percent, mainly because of higher auto prices. Moreover, bond investors found relief in the relatively contained 1.2 percent year-on-year rise in the core PPI, which was still well within the comfort range of Federal Reserve policy-makers.
Earlier data also showed industrial output fell 0.6 percent in September and there also was a dip in capacity utilisation, seen as an indicator of potential inflationary pressures.
"It's the second consecutive month that industrial output is cooling," said Gregory Miller, chief economist at SunTrust Banks. "There are fewer bottlenecks to produce inflation. The Fed will probably not be raising rates the rest of the year."
Treasuries have been on a roller-coaster ride over the past month. In mid-September, housing and other data appeared to be softening enough to boost bets on interest-rate cuts from the Federal Reserve next year.
Since then, the market decided it had gotten ahead of itself. The near-term prospects for bonds will be determined by the tone of upcoming economic data, with Wednesday's CPI a particularly relevant guidepost for monetary policy. Economists expect core CPI, which excludes volatile food and energy prices, to have risen 0.2 percent last month.
Looking ahead to the CPI data, Don Kowalchik, a debt strategist at A.G. Edwards & Sons in St Louis, said: "After today's (PPI) number I wouldn't be surprised if they were mixed as well, maybe seeing core move up a little bit and headline moving down certainly because the price of energy has moved down so much."
Five-year notes were up 1/32, yielding 4.74 percent, while the 30-year bond was 5/32 higher in price, yielding 4.904 percent. Two-year note yields were little changed at 4.85 percent.
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