Bonds Slip Ahead of the FOMC Meeting

The Treasury market weakened Monday, a selloff apparently sparked by a record-setting budget account deficit and weak foreign demand for U.S. assets. But rather than reacting to backward-looking economic news, the bond market is more likely just positioning itself ahead of Wednesday's Federal Reserve meeting.

The 10-year benchmark note was recently down 10/32, its yield jumping to 4.83%, from about 4.78% Friday. The 30-year was down 17/32, its yield rising to 4.95% from 4.91% Friday.

"This is more about trying to push yields up ahead of the FOMC meeting," says Bill Hornbarger chief fixed-income strategist at A.G. Edwards in St. Louis. The bond market is ever so slightly unnerved by the Fed's upcoming decision, as the phrase "close call" reverberates on trading floors. The August FOMC minutes revealed that members felt the decision to pause was not easy. That said, the bond market is still pricing in the soft-landing scenario, with no inflation and no more rate hikes.

In economic news Monday, the Commerce Department reported that the current account deficit grew to $218.4 billion in the second quarter of 2006, from $213.2 billion in the first quarter, and above economists' expectations for $213.5 billion. Weighing on the deficit were higher prices and an increase of imported energy, as well as more importing of automobiles. The U.S. deficit with China grew to $54.5 billion, from $49.3 billion in the first quarter. The second-quarter deficit amounted to 6.6% of U.S. GDP.

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