Bonds rebound after getting hit by better-than-expected economic reports, greenback
rallies on news.

May 17, 2005: 10:17 AM EDT

NEW YORK (CNN/Money) - Treasury prices rebounded from early losses Tuesday after a disappointing industrial production report countered earlier better-than-expected economic reports which had fueled investors' fears of inflation.

The dollar gained on the mostly upbeat news.
The benchmark 10-year note rose 2/32 of a point to 100 to yield 4.13 percent, relatively unchanged from Monday. The 30-year bond gained 12/32 of a point to 113-20/32 to yield 4.48 percent, down from 4.50 in the previous session. Bond prices and yields move in opposite directions.
Prices for the five-year note added 1/32 of a point to 100 7/32, yielding 3.82 percent, and the two-year note edged up one tick to yield 3.60 percent.
Production from factories, mines and utilities unexpectedly dropped in April and businesses ran at a slower operating rate than in March, the Federal Reserve said Tuesday.
The central bank said industrial production fell 0.2 percent last month, sharply contrary to Wall Street economists' forecasts that it would increase 0.2 percent.
But earlier Tuesday, the Commerce Department said Housing starts surged 11 percent in April, to 2.04 million new units.
The rise in new home starts followed a plunge in the previous month of March, when housing starts plunged 17.6 percent. The March drop was the steepest in more than 14 years.
The Producer Price Index, which measures prices that businesses charge one another for goods and services, was up a steep 0.6 percent in April, compared with a 0.7 percent rise in March, a government report showed Tuesday. Economists surveyed by Briefing.com had forecast a rise of 0.4 percent.
"We are seeing a healthy increase in the core level of inflation, which is concerning for inflation watchers," Richard DeKaser, chief economist at National City Corp. in Cleveland, told Reuters.
Analysts believe the report bolstered the case for the Federal Reserve to continue with its
campaign of "measured" rate hikes.
"What this does is it keeps the Fed in this tightening mode. When you couple that with the fact that we've had some slowing in the economy, that's not a combination people want to see," Bill Strazzullo, chief market strategist at State Street Global Markets, told Reuters.
Higher inflation hurts bonds as it erodes the value of the fixed-income investment. However, rising interest rates generally help the dollar as they make dollar-denominated securities more attractive to foreign investors.
In currency trading, the dollar strengthened against the euro and yen.
The euro bought $1.2618, down from $1.2634 Monday, while the dollar bought ¥107.35, up from ¥106.86 the previous session.

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