Treasury Bonds Little Changed on Optimism Fed Has Inflation Under Control
By Al Yoon
U.S Bonds Little Changed on Optimism Inflation Is Under Control
(Adds Fed funds futures, investor comment. Updates prices.)
New York, Nov. 15 (Bloomberg) - U.S. Treasury bond yields
hovered near 6 percent, after falling 34 basis points in the past
three weeks, amid investor confidence the Federal Reserve will
keep inflation from accelerating.
Trading through 10 a.m. in New York was 34 percent below
average, a day before Fed policy-makers meet to consider raising
interest rates for a third time since June. While buyers were
scarce, bonds are poised to gain after the Fed decision, said
George Simon, a strategist at A.G. Edwards & Sons, Inc. in St.
Louis.
''If the Fed raises rates, we might see a small sell-off at
first but then bonds could do better because people will see the
Fed might be done with it,'' Simon said. Bonds could also gain if
the Fed holds rates steady, although Treasuries would need
positive economic data to extend their rally, he said.
The 30-year bond fell 2/32, or 63 cents per $1,000 face
amount, to a price of 101 5/32. Its yield rose 1 basis point to
6.04 percent. Two-year yields rose 2 basis points to 5.78
percent.
Treasuries dipped briefly before a speech by Fed Chairman
Alan Greenspan, rising back to unchanged levels as he sidestepped
any references to monetary policy.
Bond futures show investors, many of whom thought the Fed
wouldn't raise rates just last week, now think the central bank
will take back its third and final rate cut of last year, when
the 30-year bond yieled about 5.30 percent.
The implied yield on the Fed funds futures contract for
November rose 1.5 basis points to 5.34 percent, suggesting a 72
percent chance of a rate increase. That's up from about a 50-50
chance seen on Friday.
Inflation 'Under Control'
Some investors said an increase in the Fed's benchmark
borrowing rate, currently at 5.25 percent, would keep inflation
from quickening and be positive for bonds. Others said a lack of
evidence that inflation was picking up pace supports an upbeat
bond sentiment, whether or not the Fed raises rates.
''The reports we've got since Oct. 28 seem to suggest that
inflation remains under control, with some signs of moderating
growth and that's good for bonds,'' said Ashok Bhatia, a trader
at Strong Capital Management in Menomonee Falls, Wisconsin. ''The
overall tone of the Treasury and credit markets seems pretty
good.''
Still, 30-year bonds don't have a lot of room to rally after
rising about 4 1/2 points since Oct. 26, Bhatia said. Bonds
recouped a third of their year-to-date losses since then, and now
post an 8.2 percent deficit, including reinvested interest.
Long-term gains for Treasuries will be difficult if the
inflation picture changes, and if faster global growth fuels U.S.
growth, said Robert Alley, who manages $3 billion of bonds at
Houston-based AIM Advisors Inc.
Worldwide Growth
''Growth is accelerating in Europe and Asia, so instead of
inflation fears it may be demand for funds that pushes rates
higher'' next year, Alley said. ''I don't see much reason to
think we're going to be out of a range of 5.75 percent to 6.50
percent'' yields in 30-year Treasuries.
To get bond yields below 5.50 percent, economic growth would
have to slow consistently over the next two or three quarters to
2 percent to 2.25 percent, which is unlikely, he said.
Alley bought Treasuries maturing in the four- to six-year
range this month as ''a hiding place'' to protect him from
potential losses whatever decision the Fed makes, he said. If it
does raise rates, shorter-maturity Treasuries could slump and if
it doesn't bonds could suffer on concerns about faster inflation.
After the Fed meeting, investors will be closely watching
the October consumer price index on Wednesday, which is expected
to rise 0.2 percent, according to a Bloomberg News survey. That
would follow a rise of 0.4 percent in September -- driven by
higher oil and tobacco prices. Excluding food and energy, the CPI
is also expected to register a 0.2 percent October increase.
A report today showed business inventories grew in September
as retailers stockpiled goods to head off Year 2000-related
supply shortfalls. Stockpiles of unsold goods rose 0.4 percent as
expected after rising 0.3 percent in August.
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