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A benign reading on consumer prices in February sparked the biggest rally U.S. Treasuries securities have seen for some time. On Thursday, the yield on the benchmark 10-year note, which moves in the opposite direction of price, fell to its lowest level since the beginning of March. A weak read on housing starts and an unexpected rise in unemployment claims only added to the theory that inflation expectations are fading. As a result, mortgage rates, which are based on Treasury yields, have begun to edge down.

The February consumer price index, or CPI, was the catalyst for strong buying in Treasuries. The CPI, which looks for inflation in retail prices, rose only 0.1 percent, as did the core rate, which excludes volatile food and energy prices. Not only did this show that inflation was a nonfactor, but it also was below analysts' estimates for a 0.2 percent rise for both overall CPI and the core.

A dip in housing starts and building permits provided further evidence of economic cooling. February starts plunged 7.9 percent to an annual rate of 2.12 million units - far below the previous 2.3-million mark but more than analysts' predictions for 2.04 million units; while building permits - an indicator of future activity - fell 3 percent to an annual rate of 2.15 million.

First-time jobless claims for the week ended March 11 were up for the third straight time, rising to 309,000 - the highest level since December. The four-week average, which smoothes volatility, rose to 296,500. Continued claims, however, fell to 2.45 million, the lowest level since February 2001. These are benefits paid to people out of work for more than one week.

The noon release of the Philly Fed index on March manufacturing conditions sealed Treasury gains, dropping to 12.3 from the previous reading of 15.4. Within the report, new orders rose, but the 'prices-paid' index declined sharply for the second straight month - good news for inflation-watchers.

Dow nears five-year high

It was a tale of two markets as the Dow Jones industrials added another day's worth of gains, while a sell-off in semiconductors pushed the Nasdaq into negative territory. Both the Dow and the Standard & Poor's 500 index made a run at a five-year high as interest rates fell and inflation worries evaporated - at least for today. The indexes traded in positive territory from open to close, but ended the session off their highs for the day. The Nasdaq traded positive for most of the session, but took a dive in the last two hours of trading, closing near its low.

The Dow Jones industrials were bolstered by a couple of big gainers, but 18 of the 30 components closed in positive territory. GM led with a 3.4-percent increase, followed by Wal-Mart, which added 2.3 percent. Interest-sensitive stocks such as 3M, Alcoa and Home Depot rose about 1 percent each, and Exxon was up 1.2 percent on an increase in oil prices. Oil jumped $1.41 today to close at $63.58. Intel was the only Dow component to shed more than 1 percent.

The Nasdaq plunged into negative territory due to heavy selling in chips, probably the most volatile sector in the tech-heavy index. Aggressive selling was evidenced by a whopping 3.2-percent decline in the Philadelphia semiconductor index, also known as SOX. Although chips led the decline there were not many big-cap techs posting gains. Oracle and Ericsson rose close to 2 percent each, but Qualcomm, which was upgraded, managed only a small gain.

As of 4 p.m. EST:

The Dow Jones industrial index closed up 43.47 points (+0.39 percent) to 11,253.24; the Nasdaq composite lost 12.28 points (-0.53 percent) to 2,299.56, and the Standard & Poor's 500 index gained 2.31 points (+0.18 percent) to 1,305.33.

The 30-year Treasury bond closed up 29/32 in price with the yield falling to 4.69 percent, from 4.75 percent on Wednesday.

The 10-year Treasury note closed up 22/32 in price with the yield falling to 4.64 percent, from 4.72 percent on Wednesday.

The five-year Treasury note closed up 14/32 in price with the yield falling to 4.59 percent, from 4.68 percent on Wednesday.

The two-year Treasury note closed down 3/32 in price with the yield rising to 4.67 percent, from 4.69 percent on Wednesday.

At 4 p.m. EST, average mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year conventional fixed-rate mortgage at 6.11 percent, down from 6.128 percent on Wednesday.

The 15-year conventional fixed-rate mortgage at 5.735 percent, down from 5.738 percent on Wednesday.

Coming up:

The week ends with two reports of moderate influence, but any report can make waves. Industrial production and capacity utilization for February are expected to rise, which might put selling pressure on Treasuries. Production is forecast to increase 0.8 percent, which would be a substantial improvement over the minus 0.2 percent posted in January. Capacity utilization, which reflects the percentage of mines, factories and utilities in full production, is predicted to climb to 81.4 from 80.9.

That report will be followed by the University of Michigan preliminary consumer sentiment report for March. According to analysts, sentiment is expected to tick up to 88.5 percent from 86.7 - the final reading for February. This survey can impact the markets, as it is believed that a confident consumer will spend, therefore growing the economy, while a wary consumer will keep the wallet closed.

Due to the significant drop in Treasury yields today, lenders should be able to begin lowering rates overnight and into Friday morning.

Carolyn Siegel

Carolyn@interest.com

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