US traders cautious as key data awaited

NEW YORK - US Treasury debt prices eased on Monday as investors chose to err on the side of caution ahead of key data on inflation and jobs later in the week.

The market's bearish tone persisted, traders said, with bond bulls still smarting from suggestions from the Federal Reserve that a more aggressive monetary stance might be required to fend off budding inflation.

"I suspect that interest rates must increase considerably more than is currently expected or has been built into forward markets," said Charles Lieberman, chief investment officer at Advisors Capital Management.

While that sentiment was becoming more pervasive in the bond market, traders would wait for further confirmation of prices gains in the data, the bulk of which was scheduled for Thursday and Friday.

In addition to major data due on those days are speeches from Fed policy-makers, leaving traders little to do but wait.

Meanwhile, their fears were reflected in a falling benchmark 10-year Treasury note US10YTRR, which was down 10/32 in price to yield 4.64 per cent -- its highest closing level since June.

That compared with 4.60 per cent on Thursday, just before the Good Friday holiday.

The short end was also lower, with two-year notes US2YTRR slipping 2/32 to yield 3.88 per cent from 3.86 per cent on Thursday.

Part of that decline was attributed to dealers cheapening the notes ahead of a sale of US$24 ($34.32) billion in new two-year notes from the Treasury.

The five-year Treasury note US5YTRR fell 5/32 in price, taking yields to 4.34 per cent from 4.29 per cent.

The 30-year bond US30YTRR fell 21/32, pushing its yield to 4.89 per cent from 4.84 per cent.

Dealers said the market could hover near current levels until the February personal income report on Thursday, which includes the Fed's favoured measure of inflation -- the core personal consumption expenditures (PCE) index.

Inflation is once again topping bond investors' list of concerns now that building price pressures on producers have started making their way to consumer goods.

The PCE index, however, has lagged the core consumer price index in recent months and analysts forecast a modest 0.2 per cent gain for February.

Perhaps even more important for the market is Friday's non-farm payrolls report, predicted to show a solid gain of 220,000 jobs in March after a 262,000 increase in February.

As the labour market firms, the potential for wage-based price pressures creeps higher, playing into current worries about more aggressive Fed rate increases.

"Given the lags between changes in interest rates and their effect on the economy, the Fed is running out of time to push rates to a level that will contain inflationary pressures next year," said Ian Shepherdson, chief US economist at High Frequency Economics.

He forecasts a year-end fed funds rate of 4 per cent, but said that level could be reached "as early as September."

Another 25-basis-point rate increase by the Fed at the May 3 meeting is fully priced into futures.

Chances of a 50-basis-point increase, which spiked after last week's CPI report, have subsided to about 30 per cent.

- REUTERS