Treasurys drop on productivity data

NEW YORK - Treasury prices fell Wednesday after a report showed workers producing at a stronger-than-forecast pace and labor costs in check at the end of 2007.

The Labor Department said productivity grew by an annual rate of 1.8 percent in the fourth quarter. The result was down significantly from the 6 percent advance seen in the third quarter, but well above the 0.5 percent gain projected in a Thomson/IFR analysts poll.

Unit labor costs, a key inflation gauge monitored by the Federal Reserve, advanced 2.1 percent in the final quarter, below the 3 percent rise projected by Thomson/IFR.

Productivity usually drops off when the economy slows down because companies are left with too many workers for the amount of work on hand. Some economists will use the news to support a case that the economy has entered a recession.

Although Wall Street suffered a case of fright due to recession fears on Tuesday that caused a massive stock sell-off, the latest report did not deter investors sending stocks initally higher Wednesday. They later fell on comments from Federal Reserve Bank of Philadelphia President Charles Plosser, who warned that the Fed is still concerned about fighting inflation even as it tries to support the flagging economy.

The benchmark 10-year Treasury note fell 15/32 to 105 5/32 with a yield of 3.62 percent, up from 3.56 percent late Tuesday, according to BGCantor Market Data. Prices and yields move in opposite directions.

The 30-year long bond declined 28/32 to 110 8/32 with a 4.37 percent yield, up from 4.33 percent late Tuesday.

The 2-year note lost 4/32 to 100 10/32 with a yield of 1.96 percent, up from 1.92 percent late Tuesday.

Yields fell in after hours trade as prices improved. At 5:30 p.m. Eastern time, the 10-year yield was 3.60 percent, the 30-year yield was 4.36 percent and the 2-year yield was 1.93 percent.

The yield on the 3-month note fell to 2.10 percent from 2.23 percent late Tuesday as the discount rate declined to 2.05 percent from 2.18 percent.

A Treasury Department auction of $13 billion in new 10-year Treasury notes attracted solid demand from both foreign and domestic investors. Investors bid for 2.34 times the amount of notes that were offered, matching the demand level seen at the previous 10-year sale in November.

A full 38.2 percent of the bids were from the group known as "indirect bidders," which has a large representation of foreign central banks. These investors have bids submitted on their behalf by third parties. The latest figure was reassuring to investors concerned that foreign central banks are diversifying away from dollar-denominated assets into higher-yielding currencies like the euro due to the U.S. dollar's weakness.

The Federal Reserve will hold its next regular monetary policy meeting on March 18, but many investors expect the central bank to order another rate cut before then.

The Fed in January cut rates by an unusually large 1.25 percentage points, but many investors think additional easing is needed and the bank has indicated it is willing to reduce the fed funds target down further.

Trading of fed funds futures contracts Wednesday indicated investors think there is a 50 percent chance for a 0.25 percentage point reduction in February.