Or no DD it is about macroeconomics and more..
Treasury Bonds Drop After U.S. Economic Reports Point to Higher Inflation
By Beth Williams, Wes Goodman and Perri Colley McKinney
U.S. Bonds Decline; ECI Report Fans Fed Interest Rate Concern
New York, July 29 (Bloomberg) -- U.S. Treasuries fell,
driving yields close to one-month highs, after a bigger-than-
expected increase in second-quarter employment costs fanned
speculation the Federal Reserve may boost interest rates soon.
The report heightened concern that rising labor costs will
push up prices on goods and services, and now ''there's a genuine
concern that the Fed will take action'' when officials next meet
Aug. 24, said Margo Cook, who helps invest the bond portfolio at
Bank of New York, which has some $50 billion under management.
The 30-year bond fell 3/4, or $7.50 per $1,000 face amount,
to a price of 88 26/32. Its yield rose 6 basis points to 6.07
percent, and earlier touched 6.12 percent, the highest level
since June 25. Yields on two-year notes, which are more sensitive
to Fed rate expectations, rose 8 basis points to 5.60 percent.
With today's declines, investors who bought 30-year bonds at
the start of the year are now sitting on losses of 10.1 percent
including price declines and interest.
''The bond market is not taking this well,'' said Charles
Parkhurst, co-head of government bond trading at Salomon Smith
Barney Inc., one of the biggest traders in the $3.4 trillion
Treasury market based on the dollar amount of bonds bought and
sold. ''There's more concern that the Fed will raise rates.''
Bonds also fell as crude oil topped $21 a barrel on the New
York Mercantile Exchange for the first time since November 1997,
further fueling concern about chances of faster inflation and
more rate increases. The Fed already boosted its target for
overnight lending by a quarter point to 5 percent on June 30.
Treasuries tumbled after the Labor Department said its index
of employment costs, or ECI -- an inflation component that's been
watched closely by Fed Chairman Alan Greenspan -- rose 1.1 in the
second quarter, above the expected 0.8 percent gain. Investors
failed to take comfort from a separate report showing economic
growth slowed more than expected in the quarter.
Inflation Pressure
Traders sold bonds because the ECI suggested the tight labor
market is leading to higher costs that can spur inflation, which
erodes a bond's value. Only yesterday, Greenspan repeated a
warning that the Fed was ready to raise rates in the face of any
signs of mounting inflation and economic growth.
The ECI is ''just one number, but it's one the Fed takes
very seriously,'' said Carl Ericson, who oversees about $6
billion as director of taxable fixed-income securities at
Colonial Management Associates Inc. in Boston. Ericson, who said
today's report increases the chances of an August rate increase,
predicted 30-year yields could rise as high as 6.25 percent in
the weeks and months ahead.
Investors shrugged off a government report showing the
economy -- now in its ninth year of expansion -- grew at a 2.3
percent annual pace in the second quarter, slower than the 3.4
percent gain expected by economists. The gross domestic product's
price deflator, a measure of inflation, was unchanged at 1.6.
Higher Rates
Brian Reynolds, who manages $1.2 billion of money market
investments at David L. Babson & Co. in Cambridge, Massachusetts,
said the average maturity on his holdings is shorter than the
benchmark against which he measures performance, which will allow
him to reinvest quickly at higher rates in case of an increase.
Federal funds futures, the futures market's closest match to
the central bank's benchmark, suggest that after today's job cost
report more investors see a rate increase at the Fed's August
meeting.
The report ''makes another Fed tightening that much more
likely,'' Reynolds said.
The implied yield on the fed funds contract for September
delivery climbed 3 basis points to 5.17 percent. That's 17 basis
points higher than the current fed funds target of 5 percent and
shows a larger camp of investors expect a rate rise in August.
The implied yield on the October contract, at 5.25 percent,
points to a rate increase as all but certain -- if not in August,
then at the Fed's Oct. 5 meeting.
Salomon's Parkhurst said his firm puts the odds at ''less-
than-50-percent'' for August because today's reports don't show
enough of an inflation threat to warrant a second rate increase
so soon.
Treasury Prices
At today's yield of 5.87 percent, U.S. 10-year notes yield
408 basis points more than the 1.79 percent yield on the most
current 10-year Japanese bond, 3 basis points more than a week
ago. U.S. debt now yields 111 basis points more than the 4.76
percent yield on 10-year German bonds, 3 basis points less than a
week ago.
About $49 billion of bills, notes and bonds traded through
most of the major bond brokers by 3 p.m. New York time, 31.4
percent less than the average Thursday in the third quarter of
1998 and 0.5 percent less than the average Wednesday in the past
month, according to GovPx Inc., which supplies information on
Treasury prices and trading.
The basis, which reflects the difference between the current
30-year bond and the June futures contract adjusted for a
conversion factor, was 11/32 lower at 293/32, or 9 5/32 points.
Yields on three-month bills rose 2 basis points to 4.71
percent on a bond-equivalent basis. Yields on six-month bills
rose 4 basis points to 4.82 percent, while one-year yields rose 6
basis points to 5.08 percent.
The five-year note fell 11/32 to 97 27/32, driving its yield
up 8 basis points to 5.76 percent.
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