US Treasury debt prices were flat

NEW YORK, July 14: U.S. Treasury debt prices were flat to slightly lower on Friday, as record high oil prices raised concerns about inflation, washing out gains from an earlier flight to quality prompted by geopolitical worries.

Unexpected declines in June U.S. retail sales and in an early July reading on consumer sentiment from the University of Michigan bolstered the view of slowing economic growth.

The data also supported the view that the Federal Reserve would raise interest rates no more than once the rest of the year, analysts said.

''It supports the ongoing trend for the Fed of 'one and done' or a pause,'' said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, Minnesota.

The surprise weakness in the University of Michigan data was ''not big enough of an expectations move to stand out for stocks and bonds,'' Paulsen said.

Treasury prices had risen in overseas trading on a widely expected move by the Bank of Japan to raise interest rates for the first time in six years. Global bond markets climbed as the Japanese central bank gave no hint of further rate increases.

Buying of Treasuries, however, did not pick up much in the wake of the U.S. consumer data, which would typically lift bond prices. Bond players were paring positions in case of surprises in next week's consumer inflation report and testimony to congress on the economy by Fed Chairman Ben Bernanke, analysts said.

Short-dated Treasuries, which are more sensitive to changes in Fed policy, were performing better than long maturity issues, suggesting that worries about inflation due to high energy prices were having more of an effect on traders than were concerns about more Fed rate hikes. Inflation affects long-dated debt, eroding the value of fixed income securities.

Inflation fears have been fanned this week by surging oil prices due to intensified fighting in the Middle East.

Treasury two-year notes, were unchanged in price to yield 5.11 percent, down 1 basis points from late Thursday.

Benchmark 10-year notes were down 1/32 in price, after gaining as much as 5/32 after the retail sales data, to yield 5.07 percent, unchanged from late Thursday.

U.S. rate futures signaled that traders are pricing in a 51 percent chance the Fed will raise rates by a quarter percentage point in August, down from a 60 percent chance late Thursday.

U.S. crude oil futures posted a record high at .40 a barrel on the clash between Israel and Lebanon.

CONSUMER SPENDING, MOOD WEAKER

The U.S. government reported that overall retail sales slipped 0.1 percent in June from May but sales excluding autos rose 0.3 percent. Analysts polled by Reuters had predicted that sales, both overall and ex-auto, would rise 0.4 percent.

A weaker-than-expected 0.1 percent increase in import prices in June was brushed off by traders, analysts said.

The University of Michigan's preliminary July reading on U.S. consumer sentiment was 83.0, down from the final June figure of 84.9 and the median forecast of 85.5.

Bond players have been preoccupied by factors besides economic indicators, analysts said.

''There is also a lot of focus on geopolitical events,'' said Beth Malloy, bond market analyst at Briefing.com in Chicago.

Escalating violence in the Middle East has spurred jittery investors to shift money from stocks into lower-risk assets such as Treasuries, analysts said.

Stocks traded lower on Friday after the unexpectedly weak retail sales and University of Michigan reports adding to worries over high oil prices and escalation global tensions.

Treasury note and bond yields have been running below the Fed's current rate target of 5.25 percent.

REUTERS