Bonds pull back on inflation fears

Early Treasury gains erased by stronger-than-expected PPI reading; dollar splits.

NEW YORK ( -- Treasury prices pared early gains Wednesday after a key gauge of inflation at the wholesale level came in higher than expected.

The dollar was up slightly against the euro and dipped against the yen.

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The benchmark 10-year note was unchanged from late Tuesday to yield 4.75 percent. Bond markets were closed Monday for Martin Luther King Jr. Day.

The 30-year bond held at 4.84 percent from the previous session. Bond prices and yields move in opposite directions.

The five-year note was also unchanged to yield 4.74 percent, while the two-year note held steady at 4.88.

Bonds pulled back to mostly unchanged after the government reported that the Producer Price Index reading, or PPI, slowed to a 0.9 percent increase in December, but topped Wall Street expectations.

Economists surveyed by had forecast a 0.5 percent rise in the most recent reading.

The more closely watched core PPI, which strips out often-volatile food and energy prices, was up 0.2 percent, compared to November's 1.3 percent increase. Economists had forecast a 0.1 percent rise in the core PPI.

Bond investors fear inflation since it erodes the value of the fixed-income paying investment.

The report is the first of a number of economic reports due out this week. Later today at 2 p.m. ET, the Federal Reserve is set to release its beige book, which includes the take on economic activity by the Fed banks around the country.

On Thursday, bond traders will look for signs about inflation pressure at the retail level with Thursday's consumer prices index for December.

In currency trading, the dollar gained against the euro and the yen. The euro bought $1.2912, down slightly from $1.2915 late Tuesday. The dollar bought ¥120.59, down from ¥120.63 the previous session.

--from staff and wire reports

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