US government debt prices fell on Thursday, despite a fall in consumer price inflation in October, but comments from Federal Reserve officials suggested it was still to early to look for interest rate cuts anytime soon.
"The bottom line for the market is that core inflation is still above target," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle, adding "given that, the Fed is not going to ease." Benchmark 10-year Treasury notes traded 9/32 lower in price for a yield of 4.66 percent from 4.62 percent late on Wednesday. Bond prices and yields move inversely.
For the 10-year note, the day marked the largest increase in yield since mid-October. Bond prices initially gained early on Thursday after a government report showed core consumer prices, excluding food and energy costs, rose 0.1 percent in October, less than the 0.2 percent gain in September.
The month-over-month reading was below economists' expectations of a 0.2 percent rise. However, the same report showed that on a year-on-year basis, core consumer prices, still rose 2.7 percent in October, well above the Fed's presumed comfort level for core inflation of 1.0 to 2.0 percent.
"I don't think this type of figure argues for a rate cut anytime soon, but the Fed can sustain this pause in interest rates for an extended period," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.
Following the release of the CPI data, Chicago Fed President Michael Moskow said although inflation was moving in the right direction, it was possible it could remain above the Fed's comfort level for an "extended period."
Bond prices pared gains after Moskow's remarks, then moved into a negative territory after reports showing factory activity in the US Mid-Atlantic rebounded in November and homebuilder sentiment was on the rise.
The Philadelphia Federal Reserve Bank said its business activity index rose to 5.1 in November from negative 0.7 in October. A reading above zero indicates growth in the region's manufacturing sector. The National Association of Home Builders said US homebuilder sentiment rose for a second consecutive month in November as sales incentives improved affordability for consumers.
A separate report showed US October industrial output rose a slightly-less-than-expected 0.2 percent after a 0.6 percent fall in September. Capacity use was little changed at 82.2 percent compared to 82.1 percent the prior month. Another government report showed net inflows of capital into the United States fell in September to $53.7 billion from August's $97.1 billion.
The 2-year note eased 2/32 in price to yield 4.85 percent from 4.82 percent late on Wednesday, while the five-year note was 6/32 lower for a yield of 4.68 percent from 4.63 percent. The 30-year note traded 16/32 lower in price for a yield of 4.74 percent.
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