Bond Brief: Post-Fed Slide
Updated from 3:48 p.m. EST
Treasuries slid Tuesday after the Federal Reserve raised the fed funds rate by 25 basis points to 4.75%, strongly implied that another hike is on the way and renewed its vow of data dependency.
Markets now turn their attention to the spate of numbers due out at the end of the week, including Thursday's reports on jobless claims and Friday's readings on personal income, personal spending and factory orders.
"The bottom line is that the Fed is basically confident in the economic recovery and confident that they'll achieve price stability, but believe that they have to continue to remove accommodation from financial conditions," says John Herrmann director of economic commentary for Cantor Viewpoint, a unit of Cantor Fitzgerald, one of the world's top Treasury bond brokers.The benchmark 10-year note ended the day down 18/32 to yield 4.78%, briefly touching a key technical level at 4.80%, and the 30-year bond lost 30/32 of a point to yield 4.79%. Bond prices and yields move in opposite directions. The two-year note was off 4/32 to yield 4.79%, and the five-year was down 12/32 to yield 4.78%. "The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace," said the policy-setting Federal Open Market Committee in the statement that accompanied its 15th-straight rate hike. But the committee also said that higher energy prices and possible increases in resource utilization could add to inflation pressure. In an echo of its January statement, the Fed wrote:
"The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.""They kept the risk-assessment portion of the statement identical to that in January, which means they have a tightening bias," says Herrmann. "Another 25 basis points at the May meeting is on the table and in play." Yields on longer-dated maturities, i.e. the 10- and 30-year, have remained low despite 21 months of steady fed funds rate hikes. Normally, these yields rise in tandem with changes on the short end, but for the last year the "curve" has been flat or has even inverted. Among the many reasons cited for this phenomenon, economists point to the fact that the idea that the Fed will successfully keep inflation in check boosts the attractiveness of longer-dated securities. This is because inflation erodes the value of fixed-income investments and deals a tougher blow to securities that are held for a longer period of time. But the idea that the Fed is vigilant on inflation did not support the long end Tuesday. Rick Klingman, chief Treasuries trader at ABN Amro, says that's because the whole curve had to adjust to the new fed funds rate. Immediately following the announcement, Treasuries extended losses and yields across the board popped above the new overnight lending rate. "The long end sold off, but it has performed relatively well compared to short rates," says Klingman. "The curve-flattening environment we've had will come to an end as people get a sense that the Fed is done." The Fed statement also shows that the committee will remain data-dependent, Bill Gross, managing director of the world's largest bond brokerage, PIMCO, told CNBC. Labor "is the key for the Fed going forward," Gross said. To that end, the FOMC statement said that "ongoing productivity gains have helped to hold the growth of unit labor costs in check." In economic news earlier Tuesday the March index of consumer confidence jumped a stronger-than-expected 4.4% to 107.2 -- the highest since May 2002. The expectations component rose 7% after two months of decline, and the current conditions component showed a fifth consecutive gain of 2%.
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