BOND REPORT: Treasurys Climb On Inflation Report

By Ben Eisen, MarketWatch

NEW YORK (MarketWatch) -- Treasury prices climbed Thursday after data showed that inflation remained subdued, and market experts began to point to the slow increase in costs as one factor that could keep a lid on interest rates as the economy improves.

The consumer price index rose 0.3% in December, matching analyst forecasts. Stripping out volatile food and energy costs produced a core CPI of 0.1% in December, compared with an economist consensus of 0.2%. The rise in prices was led by higher energy and shelter costs, the Labor Department said Thursday.

However, the full-year pace of inflation slipped to 1.5% in 2013 from 1.7% the previous year, which compares with a Fed target of 2%.

After the data, the 10-year note (10_YEAR) yield, which falls as prices rise, was down 3 basis points on the day at 2.852%. The 30-year bond (30_YEAR) yield fell 2 basis points to 3.784% and the 5-year note (5_YEAR) yield fell 2.5 basis points to 1.647%.

Treasury yields have been inching higher in the past month on improving economic data, paired with the Federal Reserve decision to begin winding down its bond-buying program. But inflation has remained a notable exception to the accelerating economic outlook.

BlackRock CEO Larry Fink predicted Thursday that inflation won't rise dramatically, which will help keep rates from accelerating higher. Despite forecasts of climbing Treasury yields, Fink sees the market as being "more muted than consensus," he said on CNBC Thursday.

Meanwhile, John Williams, president of the San Francisco Federal Reserve Bank, asked in a speech Thursday whether the central bank's 2% inflation target was adequate to keep its rate of growth from falling towards disinflation or deflation

"Does the 2% inflation target adopted by many central banks provide a sufficient cushion to allow monetary policy to successfully stabilize the economy and inflation in the future?" he asked.

Data also showed Thursday that the number of people applying for unemployment benefits dropped by 2,000 to 326,000 the lowest level in six weeks. Economists polled by MarketWatch had expected claims to hit 330,000.

Stocks fell, weighed by a disappointing earnings report from Citigroup Inc. (C) and a sales warning from Best Buy Inc. (BBY)

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