J Treasurys Lose Momentum Amid Data, Fed Speak -2-
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At a Baltimore economic conference sponsored by Towson University, the Fed's Lacker told reporters that minutes of the Dec. 13 Federal Open Market Committee meeting suggest at least one more rate hike is likely before the end of the central bank's tightening campaign, which began in mid-2004 and has so far pushed the fed funds rate from 1% to 4.25%.
That helped arrest Treasurys' earlier momentum and push the 10-year yield back above the two-year yield. Earlier, the 10-year yield was below a host of shorter-dated maturities, including the two-year, three-year and six-month bills - a bond market rarity known as a yield curve inversion.
In the past, this has suggested the Fed had gone too far in hiking rates and was risking an economic slowdown or recession, though many economists and officials, including Fed Chairman Alan Greenspan, say changes in global markets have changed the meaning of an inversion.
But many bond market participants say the current level of yields and prices are indicative of a bond market that really does think the Fed is in danger of overshooting on rates.
"Odds are the Fed will raise rates to 4.50% at the end of the month, and you'll probably have a five-year yield sitting at 4.30%," said Scott Gewirtz, head of Treasury trading at Lehman Brothers in New York. "For that situation to exist, you really have to have a strong opinion that the Fed is going to have to reverse course and start cutting rates."
Earlier Wednesday, Fed Governor Susan Bies sounded slightly more dovish, saying the economy should slow to a more sustainable pace in 2006. But she said the central bank remains on high alert for inflation due to higher energy prices and added that officials "are much more data dependent in this year," highlighting figures such as capacity utilization and employment.
Earlier, the Labor Department reported that the consumer price index fell 0.1% in December, surprising economists who were expecting a 0.2% gain. The non-food, non-energy core CPI increased by 0.2%, in line with expectations.
Some market participants said the global stock market sell-off should have caused U.S. bond prices to rally more than they did earlier in the session - as investors seek a safe-haven investment.
However, Treasurys are already "very expensive at their current levels," which is serving to limit the gains, said Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey City, N.J., who oversees about $2 billion in fixed income.
A rise in energy prices and worries over Iran have lent support for Treasurys in recent sessions, already constituting something of a flight-to-quality bid, said Michael Kastner, head of fixed income at Sterling Stamos Capital Management in New York, with about $2.5 billion in fixed-income assets.
"This is a lot to be nervous about at the moment," Kastner said.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
4 3/8% 2-year 100 1/32 dn 1/32 4.35% +1.6 BP
4 3/8% 3-year 100 6/32 dn 1/32 4.30% +1.8 BP
4 1/4% 5-year 99 26/32 dn 3/32 4.29% +2.0 BP
4 1/2% 10-year 101 4/32 dn 6/32 4.36% +2.3 BP
5 3/8% 30-year 112 15/32 dn 14/32 4.54% +2.6 BP
2-10-Yr Yield Spread: 1 BPs Vs 0 BPs
Source: TradeWeb
-By Steven C. Johnson, Dow Jones Newswires; 201-938-2018; steven.johnson@dowjones.com |
