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Non-Tech : Bill Wexler's Trading Cabana -- Ignore unavailable to you. Want to Upgrade?

To: RockyBalboa who wrote (583)	5/4/2005 3:47:09 PM
From: RockyBalboa	Read Replies (1) \| Respond to of 6370

=DJ FED WATCH: Long Bond No Solution To Greenspan Conundrum 05/04/2005 Dow Jones News Services (Copyright © 2005 Dow Jones & Company, Inc.) By Michael S. Derby A DOW JONES NEWSWIRES COLUMN NEW YORK (Dow Jones)--The almost certain reintroduction of the 30-year bond by the Treasury Department will not give the Federal Reserve any relief in its bond market "conundrum." Economists say the length of time it will likely take the Treasury to gear up to sell the long bond, coupled with the likely investor appetite, means it's unlikely that long term yields will rise much any time soon. On Wednesday, the government said it may bring back the issue to tackle its financing needs, reviving a security last sold in 2001. In turn, analysts' expectations indicate the strong possibility that the Fed will continue to face for some time historically low long market rates, of the sort that are blunting the impact of monetary policy on the economy. Indeed, the market's performance has been unusual in a world where the Fed is tightening interest rates, is expected to tighten further, and market participants regularly talk of their inflation fears. In mid-February, Fed chairman Alan Greenspan told Congress he viewed the stickiness of long-term rates as a "conundrum." "We are talking about a very long transition period here" for the reintroduction of the 30-year and its impact on the market "will not be fully reflected in market relationships until the day of reckoning is here," said Ward McCarthy, of analyst firm Stone & McCarthy Research Associates in Princeton, N.J. He reckons the most immediate impact for the Fed will be that "the conundrum will not worsen" as long term rates in the bond market find a floor through which they won't fall any further. Mad World The performance of Treasury yields has been very unusual throughout the Fed's tightening cycle. Yields ended 2004 about where they started, even as the Fed began tightening rates. Greenspan's conundrum comment helped spark modest selling in Treasurys earlier this year, with the 10-year moving up from around 4.16% in mid-February to peak at 4.64% on March 28, before marching back down. The 10-year note's yield stood at 4.19% in afternoon trading Wednesday, and was little affected by the Treasury's surprising announcement of the possible return of the 30-year. Indeed, the only issue that really reacted was the current long bond, a very illiquid issue - its yield rose over six basis points to 4.58%. The stickiness of long term rates is problematic in a tightening cycle because it means the constriction of liquidity the Fed is trying to engineer via rate hikes isn't being passed through to the economy. Many economists agree the Fed would like to see higher yields because they would retard growth and help the central bank contain the inflation pressures that are increasingly evident throughout the economy. Some officials on the Fed have argued a benign view of the bond market situation. They noted that long-term rates reflect confidence from market participants that the Fed will keep inflation under control. But that argument skips the fact that over recent months, short-term rates on issues like the two year have also fallen. Kathleen Stephensen, an economist with Credit Suisse First Boston in New York, also sees a limited impact to the market should the 30-year return. She said a reintroduction "is fairly good news" for market participants who need long maturities to invest in. There are a lot of those individuals out there, she said, and their "pent up demand" will "alleviate or tame any upside move in yields," thus keeping the long end of the curve relatively stable at least for a while. Chris Rupkey, economist at Bank of Tokyo-Mitsubishi, unlike other forecasters, said the long end of the market could prove more volatile with a long bond in the mix. He explained, "the 30-year bond is also going to mean that yields will be about 20 basis points higher than they would have been." (Michael S. Derby writes about markets, the economy and the Federal Reserve for Dow Jones Newswires.)