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| Old conundrum, new twist
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| Inverted or flat, the yield curve points to a weaker Federal Reserve, not a downturn. (Full story)
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NEW YORK (CNN/Money) -
Treasury prices retreated from early gains, ending slightly higher Wednesday after the Federal Reserve's "beige book" report showed prices increases, despite promises to fight inflation by officials at the central bank.
Meanwhile, the dollar fell against the euro and yen.
The 10-year bond rose 2/32 of a point to 98-09/32 to yield 4.46 percent, down from 4.47 late Tuesday. The 30-year bond rose one tick to yield 4.68 percent, down from 4.69 in the previous session. Bond prices and yields move in opposite directions.
In shorter-dated debt, the five-year note rose 1/32 of a point to yield 4.32 percent, while the two-year note was relatively unchanged yielding 4.24 percent.
Treasury prices retreated Wednesday afternoon following the release of the Federal Reserve's "beige book" summary of economic conditions, which had rekindled inflationary fears. In its report, the central bank reported that hurricane damage and higher energy prices had pushed up retail prices in some regions of the country during September and early October.
"All Districts reported cost increases for energy, petroleum-based products, building materials, and shipping," the Fed's "beige book" summary of economic conditions said.
Earlier Wednesday, a group of officials at the central bank predicted that they would have to continue their monetary tightening campaign in order to stay ahead of inflation.
"We are considerably closer to where policy needs to be than we were 16 months ago, but we are not yet at a point where we can stop and watch the economy evolve for a while," Federal Reserve Board Governor Donald Kohn said in a speech he was prepared to deliver at Carnegie-Mellon University in Pittsburgh.
In separate speeches, Dallas Fed President Richard Fisher, New York Fed President Timothy Geithner and Cleveland Fed President Sandra Pianalto all echoed Kohn's comments, noting that interest rate hikes may have curbed inflationary pressures, but that they still posed a risk.
None of the Fed officials, including Pianalto who spoke to a Columbus, Ohio group Wednesday, could indicate what the campaign of interest rate hikes may end.
"The answer to how much higher the federal funds rate needs to go depends on how economic conditions unfold," said Pianalto.
The specter of rising inflation is usually bad for Treasury prices, since it erodes the value of the fixed-income investment. Consequently, the yield on longer-dated debt usually rises to account for additional risk taken on by investors who lend the government money for longer periods of time.
"The perception in the market that the Fed has done a good job of controlling inflation spirals has taken the risk premium from the back [or long] end of the yield curve," said John Herrmann, director of economic commentary for Cantor Viewpoint, a unit of one of the world's top Treasury bond brokers, Cantor Fitzgerald.
He added that this has kept and will continue to keep prices on the 10-year high and yields low, even though the Fed has been raising the overnight lending rate for more than a year and markets see the Fed funds rate going as high as 4.25 percent from the current 3.75.
Keeping U.S. inflation in check will also keep Treasuries attractive to foreign central banks, which own more than 50 percent of U.S. paper, by lowering the perceived risk on a longer-dated bond.
In currency trading, the dollar drifted against the euro and yen, with the dollar buying ¥115.33, down from ¥115.66 late Tuesday, and the euro buying $1.1996, up from $1.1961.
--from staff and wire reports
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