01/25 10:42
Treasuries Decline After Greenspan Shows Support for Tax Cuts
By Al Yoon
New York, Jan. 25 (Bloomberg) -- Treasuries fell after Federal Reserve Chairman Alan Greenspan indicated support for tax cuts that may reduce the need for interest-rate cuts by the Federal Reserve in coming months.
``Tax cuts would mean more economic stimulus and less rate cutting'' than the Treasury market has been expecting, said Stephen Gallagher, an economist at Societe Generale. Treasuries ``needed something to validate those (expectations,) and they're not getting it.''
The benchmark 10-year Treasury dropped 14/32, or $4.38 per $1,000 face amount, to a price of 102 7/8. Its yield rose 6 basis points to 5.36 percent. The two-year note -- among securities most- sensitive to Fed rates -- fell 6/32 to 99 23/32 as its yield rose 11 basis points to 4.9 percent.
Treasuries slumped as Greenspan showed some support for tax reductions based on rising federal budget surpluses. Even as he also maintained support for paying down the nation's debt, some analysts were skeptical that the paydown would be as fast as the bond market had anticipated.
``The emerging key fiscal policy need is to address the implications of maintaining surpluses beyond the point at which publicly held debt is effectively eliminated,'' Greenspan said.
``He seemed to be saying that we don't need to run such big surpluses, which is a negative for (bonds) because it means the (Treasury's debt repurchases) won't continue at the same pace,'' said Peter Cordrey, who helps oversee $130 billion at Prudential Asset Management in Newark, New Jersey.
Employment Costs
Traders trimmed expectations for a half-point rate cut at the Fed's Jan. 30-31 meeting. The implied yield on the February fed funds futures contract rose 3.5 basis points to 5.6 percent on the day, and 7 basis points this week.
The Fed surprised investors on Jan. 3 by cutting its target for overnight lending between banks by a half-point to 6 percent, citing a further weakening of economic conditions, the impact of lower stock prices on consumer spending and waning consumer confidence. Fed policymakers had raised the target by 1.75 percentage points between June 1999 and May 2000.
Investors bought bonds earlier after a report suggested tame inflation wouldn't prevent the Fed from lowering its overnight lending target by a half-point at its policy meeting next week. The government said its employment cost index rose 0.8 percent in the fourth quarter, below the 1.1 percent rise expected by economists in a Bloomberg News survey.
Consumer price inflation has held at a 3.4 percent year-over- year pace through December, down from an 8 1/2 year high rate of 3.8 percent in March. This puts inflation-adjusted 10-year yields below 2 percent. |
