Markets & Stocks - Bonds head south; dollar mixed

money.cnn.com February 21, 2003: 4:17 PM EST

Treasurys hit by profit-taking after a solid week; economic data, war worries weigh on dollar.

NEW YORK (CNN/Money) - Treasury prices slipped back to the minus column Friday as profit-taking set in after a week of solid gains, though anxiety ahead of the weekend limited the losses.

Around 4:00 p.m. ET, the benchmark 10-year note fell 6/32 of a point in price to 99-27/32, yielding 3.89 percent, while the 30-year bond dropped 21/32 to 107-31/32, yielding 4.85 percent.

The two-year note was off 1/32 of a point to trade at 100-1/32, yielding 1.60 percent. The five-year note lost 3/32 to 100-22/32, yielding 2.85 percent. Yields move in the opposite direction from prices.

Treasurys were relieved at a very benign U.S. inflation reading for January. The consumer price index rose 0.3 percent, exactly as analysts had expected, quelling fears of a repeat of Thursday's surprisingly steep rise in producer prices.

The core CPI, which excludes volatile food and energy costs, was even better behaved, rising just 0.1 percent against forecasts of a 0.2 percent gain.

A 6.6 percent jump in gasoline prices was balanced by surprise falls in the cost of new cars and food, while annual growth in the core measure held at a three-year low of 1.9 percent.

Analysts noted that gasoline prices were up no less than 29 percent on the year and that would act as a tax on consumers, soaking up money that could have been spent on other things.

Also, with producer prices rising much more than retail prices, corporate profit margins were being squeezed, and that was a negative for equities.

Upbeat comments on the economy from Federal Reserve governor Ben Bernanke had little effect, since this is the standard line from the central bank and expectations of a sustained recovery have been disappointed in the past.

Geopolitical tensions were ever-present, with the U.S. seemingly moving a small step closer to war Friday when Turkey's Prime Minister Abdullah Gul said an aid agreement would be reached shortly granting an urgent U.S. request to station troops on its soil.

Turkey and the United States have been wrangling for weeks over the request, raising the possibility that Washington could abandon a planned northern front from Turkey it hopes would lessen the length of any war and reduce U.S. casualties.

A refusal would have complicated the military mission and perhaps delayed an attack.

Dealers have little doubt that war will come. Thursday the United States said it had massed a big enough force in the Gulf to attack Iraq at any time, and senior officials said Washington would seek United Nations approval next week for a possible war. Economic data, war worries weigh on dollar

The U.S. dollar sank to one-week lows versus the euro, hung over from poor U.S. economic data and worries about war in Iraq, but rose against the yen on signs of covert intervention by Japanese authorities.

"This latest pop-up in dollar/yen is probably stealth Bank of Japan intervention, because on a quiet day they can't keep it so covert when Japanese banks buy during U.S. trading hours in unison," said Lara Rhame, U.S. foreign exchange economist at Brown Brothers Harriman in New York.

She was referring to the dollar's jump from near three-week lows around the ¥118.30 level around noon to its current value of ¥118.71, a gain of 0.3 percent from Thursday's New York close.

The euro hit a one-week high of $1.0847 on Friday before easing back to $1.076 on the day.  

-- from staff and wire reports