US government bond prices fell on Friday, after a report showed consumers' inflation expectations jumped, reawakening investors' concerns the Fed might hold interest rates unchanged for many months.
That put bond investors back on alert that the Federal Reserve may have to hold interest rates unchanged for months before core inflation subsides enough to allow rate cuts.
In spite of a weaker than expected economic picture from the Reuters/University of Michigan preliminary consumer sentiment report for April that was positive overall for bonds, the inflation component weighed on the market.
In the report, "the news on the surface looked good for bonds, but the details were worrisome. The one year inflation outlook was one of the worst readings of the past decade," said Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co in New York.
The median one-year inflation expectations rose to 3.3 percent in the preliminary report for April, up from 3.0 percent in March. The benchmark 10-year note's price traded down 2/32 for a yield of 4.75 percent, versus 4.74 percent late on Thursday.
Earlier, Treasury prices had posted modest gains after a report showed core producer prices for March were flat. But the market's gains were muted partly because investors are waiting on the March reading for US consumer prices due next week which is likely to be a more telling read of core inflation, analysts said.
The Fed recently reiterated that inflation remains its main concern. "The core PPI number that we saw helps alleviate some of the selling pressure we have seen building in bonds over the last 30 days or so, but I think all eyes will be on the CPI next week," said William Bellamy, director of fixed income, with Thompson, Siegel & Walmsley in Richmond, Virginia.
"In the near term the core PPI reading lets things stabilise but we would like to see a trend develop in terms of lower inflation here, which is why I think you are seeing the rally stalling," Bellamy said. The 30-year bond, which is particularly sensitive to inflation expectations, traded down 11/32 in price for a yield of 4.94 percent, versus 4.91 percent late on Thursday.