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NEW YORK (Reuters) - U.S. Treasury debt prices slid on Wednesday while
benchmark yields notched seven-month highs as traders saw stirrings of
inflation in the Federal Reserve's beige book summary of economic
conditions.

Although the Fed said in the beige book that retail prices were
generally flat or up only modestly, the report added that businesses
continued to face rising input costs and that in some areas they saw
greater ease in passing along those price increases to the consumer.

The hint of rising prices was enough to crack the whip on a bond bear
stampede that began on Tuesday, driven by technical selling and
characterized by increasing unease about the risk of inflation.

The benchmark 10-year Treasury note (US10YT=3DRR: Quote, Profile,
Research) lost 1-1/32 in price, lifting yields to 4.52 percent from
4=2E395 percent late on Tuesday, and to their highest level since late
July.

"You are seeing a major price correction, and it is being blamed on
anything you see, including ... inflationary pressures," said Kathleen
Stephansen, director of global economics at Credit Suisse First Boston
in New York.

"If you are concerned about inflationary pressures you can dig into
what ever the beige book is telling you and that is enough to say 'We
are going to get more inflationary pressures down the road,"' she said.

Faster inflation would not only eat into the fixed returns offered by
Treasuries, but could also force the Federal Reserve to raise
short-term interest rates at a speedier pace.

Sellers also may have taken a cue from Chicago Fed President Michael
Moskow, who said that low long-term yields remain a conundrum despite
the Fed having tightened official interest rates by 150 basis points
since last June.

Moskow said that with the U.S. expansion firmly in place, "the issue of
inflation becomes increasingly important."

Chart watchers were now looking for the yield on the 10-year note to
rise to the 4.53/55 percent area and perhaps even to return to last
year's highs above 4.80 percent.

"This is looking like a watershed for the market here," said Sadakichi
Robbins, head of global fixed-income trading at Bank Julius Baer. "The
clear break of the range augurs much higher yields and could well force
convexity hedging from the mortgage guys."

There was some relief that a $15 billion auction of new U.S. government
paper drew reasonable demand. The Chicago Fed's Moskow did say the
process of raising rates would likely remain "measured" -- shorthand
for quarter-percentage point hikes.

=A9 Reuters 2004. All Rights Reserved.



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