Justin Lahart
Treasuries 
sold off Tuesday following a report suggesting that the Federal Open Market Committee may ease rates by only a quarter-point when it meets at the end of the month, rather than the half-point that most market participants expect.
Market News' Stephen Beckner -- one of a handful of writers the central bank is believed to leak information to -- wrote that there is a real possibility the FOMC will go with a more moderate easing. "It's credible," says Miller Tabak bond market strategist Tony Crescenzi. "A smaller move could be adjusted by the apparent stability of financial markets." Since the Fed surprised the market with a half-point cut at the beginning of the month, credit spreads have narrowed and stocks have rallied. Corporate bond issuance is up and there's been a boomlet in mortgage refinancings. Moreover, weekly reports from the major retailers suggest that sales are doing better in January, and the cold snap that constrained economic activity in November and December has eased. "You could argue it either way," J.P. Morgan Fleming Asset Management chief market strategist Don Fine says of whether to trim rates by a quarter-point or a half-point. "The economy is clearly slowing down, but thus far it is mostly in the manufacturing sector. The service sector has been relatively unaffected so far." Unemployment remains low and wages have yet to come under any real pressure. It's an environment where, at least in the back of their minds, some FOMC members may be worrying about the possibility of heating the economy too quickly, and thus courting inflation. The benchmark 10-year Treasury, which was higher early in the day, was lately off 12/32 to 103 16/32, pushing the yield up to 5.28%. Yet despite the bond market's reaction, equities continued to march higher -- the S&P 500 was up 1.2%, hanging near its highs of the day. "The stock market didn't get hurt by this -- that might be a signal to the Fed that it would be safe to go with 25" basis points of ease, mused Crescenzi. More likely, the Market News story, and an upbeat assessment of the U.S. financial system from New York Fed President William McDonough this morning, are simply a way of telling the market that a half-point cut isn't baked in the cake. More than anything, the article focuses market attention on Fed Chairman Alan Greenspan's upcoming testimony before the Senate Budget Committee. "I think Greenspan on Thursday will give you a very clear idea of whether he's doing 25 basis points or 50," says Fine.
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