Treasuries Fall as Fed Keeps Interest-Rate Target Unchanged
By Al Yoon
New York, Dec. 19 (Bloomberg) -- U.S. Treasuries fell as the Federal Reserve left interest rates unchanged and said economic growth may slow, disappointing some investors who hoped a rate cut would come as early as today.
Fed officials left the target for overnight lending between banks at 6.5 percent for the fifth meeting since May. While the Fed said it was concerned about economic weakness, some investors expected a stronger statement on the risks of slower growth.
If policy-makers ``were really worried they would have cut rates,'' said James Paulsen, chief investment officer at Wells Capital Management in Minneapolis, which has $75 billion under management. Even as the Fed said concerns of cooling growth outweigh those of faster inflation, that's ``not much different from'' a balanced statement, he said.
The most-active 10-year note fell 5/32, or $1.56 per $1,000 face amount, to a price of 104 6/32. Its yield rose 2 basis points to 5.19 percent, 2 basis points above the 20-month low reacehd yesterday. The current two-year note fell 1/32 to 100 1/2 as its yield rose 3 basis points to 5.34 percent. The 30-year bond dropped 15/32 to 111 10/32 as its yield rose 3 basis points to 5.47 percent.
The Fed raised its fed funds target by 1.75 percentage points between June 1999 and May of this year to slow growth and rein in inflation.
``While some inflation risks persist, they are diminished by the more moderate pace of economic activity and by the absence of any indication that longer-term inflation expectations have increased,'' the Fed said in its statement. Rising energy costs, eroding consumer confidence and shortfalls in company sales and earnings were cited as evidence of further economic slowing.
Some Surprise
The meeting's outcome came as a surprise. Just three out of 27 primary dealers that trade directly with the central bank -- Deutsche Bank Securities, HSBC Securities (USA) Inc. and Nomura Securities International -- expected the Fed to bypass a balanced position to one leaning toward slower growth.
For the past three months, futures traders have been pricing in some chance of a Fed rate cut next year. By the end of the first quarter, traders still expect the Fed to cut interest rates by a total of a half-point, based on the 5.95 percent implied yield on the April fed funds contract.
Fed funds futures are the market's closest match to expected changes in the Fed's target. The 6.175 percent yield on the February contract shows traders see a quarter-point cut coming at the Jan. 31 Fed meeting. Still, not everyone agrees with that assessment.
``We are struck by the mild language (regarding) the slowdown and the reaffirmation that inflation risks remain, said Ian Shepherdson, an economist at High Frequency Economics in Valhalla, New York. ``A January (rate cut) is not a done deal.''
A Good Year
Investors sold notes and bonds before the meeting as some questioned the magnitude of rate cuts already built into prices, and as they locked in gains from the year's rally that's produced 15 percent returns on 10-year notes and a 21 percent gain for 30- year bonds.
``The market always overshoots, and some people can take advantage of how low yields are'' by selling Treasuries, which have rallied most of the year, said Ken Anderson, who invests $35 billion in government debt at Evergreen Asset Management in White Plains, New York. The 10-year yield may rise to as high as 5.45 percent while trading lags over the winter holidays, he said.
Imposing rate reductions sooner rather than later may also reduce the number of cuts needed overall, said Michael Kastner, who invests $10 billion at Bankers Trust Private Banking, a unit of Deutsche Bank AG. He has been buying notes that are likely to outperform bonds as interest rates fall.
``The Fed is cognizant the economy has slowed meaningfully, Kastner said. If they had cut rates today, that would have given them a headstart and allowed policy-makers to be less aggressive with cuts down the line, he said.
Best Regards, J.T. |
