Inflation expectations at lowest ever; Federal Reserve's October minutes on tap NEW YORK (MarketWatch) -- Treasury prices traded higher Wednesday, led by longer-term debt, after a pair of government reports showed that U.S. consumer prices dropped the most ever for a single month and that housing starts fell to a record low in October. Ten-year note yields ) fell by 9 basis points, or 0.09%, to 3.44%. The yield earlier touched the lowest since Oct. 6. Benchmark 10-year notes have gained for two days as economic data pointed to the economy slamming on the brakes and to inflation risks in a deep freeze. The consumer price index declined 1% last month, compared to a median estimate of economists surveyed by MarketWatch for a 0.9% drop. Excluding food and energy, prices declined 0.1%, the first drop in the so-called core CPI since 1982 and far from the 0.1% increase anticipated. See Economic Report. "With the talk of deflationary scenario brought on by the real-estate hangover and fallout in commodity prices ... we are constructive on more funds finding its way to the long-end of the market," said Thomas di Galoma, head of U.S. government-bond trading at Jefferies & Co. Long-term inflation expectations remained at the lowest ever. The gap between regular 10-year notes and Treasury Inflation Protected Securities, an expression of what investors predict inflation will be over the life of the debt, dropped to 0.52%. That's the smallest since the government began selling TIPS in 1997. Yields on 30-year bonds fell 9 basis points to 4.03%, the lowest in three weeks. A separate government report showed builders broke ground on homes at a 791,000 annual rate during October, slowing 4.5%. See full story. Wither the Fed The Federal Reserve will release the minutes from both of its October meetings at 2 p.m. EST. The report will also include policy makers' forecasts for inflation and growth. Investors and strategists will parse the minutes to determine whether the Fed may lower its target lending rate next month to an all-time low. Against this backdrop, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said the central bank has done about as much as it can after cutting the target rate to 1%, according to media reports. "There is a risk that the minutes reveal the sentiment Hoenig hinted at: we're pretty much done," said David Ader, head of government bond strategy at RBS Greenwich Capital. Many analysts say the Fed may not cut the target rate after allowing the effective federal funds rate to actually trade well below the target rate for weeks on end, in what some call a stealth easing. That may be reducing demand for shorter-term Treasurys, which are more sensitive to monetary-policy expectations. "While we're optimistic the Fed will keep rates low, perhaps for two years, in the very short-term, the front end is suffering indigestion," said Michael Cheah, a bond portfolio manager at AIG SunAmerica Asset Management. "Cuts are no longer meaningful." Two-year note yields rose 3 basis points to 1.17%, after trading at the lowest in five years. Also Wednesday, Fed Vice Chairman Donald Kohn gave a speech in which he said the current financial crisis is likely to persist "for a while." Richmond Fed President Jeffrey Lacker is also scheduled to speak Wednesday afternoon.

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