Mon Jul 12, 2004
By Pedro Nicolaci da Costa

NEW YORK, July 12 (Reuters) - Treasuries prices edged higher on Monday as traders banked on the possibility that data due out this week would offer further signs of a slowdown in U.S. economic growth.

The market largely brushed aside two regional manufacturing reports showing upticks in factory output in Chicago and Kansas, betting that retail sales data on Wednesday would confirm an ebbing of consumer spending and help bonds.

Expectations for slower growth have already knocked Treasury yields lower as investors became increasingly certain that the Federal Reserve would honor its pledge to be "measured" in raising interest rates.

"With prices staying low and key indicators including the employment data weakening, there are mounting concerns in the U.S. that previously rampant economic growth is beginning to lose momentum," said Toshiyuki Suzuki, senior economist at UFJ Bank in New York.

"There is deep-rooted confidence that the Fed's decision to raise interest rates at a 'measured' pace is the right one," he said.

Such confidence helped lift the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) 4/32 in price, lowering its yield to 4.44 percent from 4.46 late Friday. A break below 4.41 percent, a trough hit after the soft June payrolls report, would take yields to 10-week lows and open the way for a technical rally to 4.32.

Analysts said that even if retail sales data do prove weak, bond investors might be tempted to wait for inflation figures due later in the week before making any major Treasury debt purchases.

"Retail sales are expected to be down, but worry about PPI and CPI releases Thursday and Friday could keep any bond market rally in check," said Chris Low, chief economist at FTN Financial in New York, referring to the producer and consumer price indexes.

Inflation picked up substantially in the first few months of the year, threatening the real return from fixed-income debt. Still, Federal Reserve officials have said the spike is transitory and that inflation will moderate enough to allow them to raise interest rates gradually.

A rise of 0.2 percent or less in the June core CPI would tend to support the Fed view, although that would still see the annual rate tick up to 1.9 percent, its highest level since January last year.

As traders waited for the numbers, market action in shorter-dated maturities was restrained. Yields on the two-year note (US2YT=RR: Quote, Profile, Research) were stuck at 2.52 percent, while those on the five-year (US5YT=RR: Quote, Profile, Research) edged down to 3.62 percent from 3.64.

At the long end, the 30-year bond (US30YT=RR: Quote, Profile, Research) gained 5/32, allowing its yield to ease to 5.20 percent from 5.21 on Friday.

"The rally in the long end could continue if, for instance, core CPI had a 0.1 percent print, with the curve flattening somewhat," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York.

He expected the data on the growth side of the economy to remain soft with real consumer spending struggling to rise even 2.5 percent in the second quarter. If so, that could limit real gross domestic product growth to just 3.5 percent when the figures are released on July 30.

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