Long-Term Treasuries Weaken as Fed Guessing Game Heats Up
Short-term Treasuries gathered strength today, amid growing confidence that the latest economic reports give the
Federal Reserve more reason to lower interest rates.
The two-year note, which moves most dramatically to expectations of future rate cuts, recently gained 2/32 to 100 17/32, lowering the yield, which moves in the opposite direction of the price, to 3.959%. The 10-year benchmark note slipped 4/32 to 98 1/32, yielding 5.260%, while the 30-year Treasury bond fell 9/32 to 95 11/32, raising the yield to 5.701%.
"In the past, rate cuts have been more one-sided in terms of market expectations. But with some of last week's numbers, it looks like the side for 50 basis points is starting to win the tug of war," said one bond trader who didn't want to be named. The trader cited the "benign"
consumer price index and
producer price index figures, which were released last week, as signs that inflation, or higher prices, won't prevent
Alan Greenspan and his band of central bankers from continuing their aggressive rate cuts.
The CPI for May, released Friday by the
Labor Department
, rose 0.4%, as expected. Last Thursday's PPI rose just 0.1%, compared with the 0.3% increase expected by economists. "The Fed certainly has more breathing room," the trader said.
So far, the Fed has reduced short-term interest rates by 250 basis points since Jan. 3. Before last week, most market watchers were expecting the Fed to move by another 25 basis points at its June 26-27 meeting. With the latest economic data, which show ongoing weakness in the industrial and manufacturing sectors, along with the drumbeat of corporate worries, more experts are starting to believe a 50-basis-point cut is possible. The July
fed funds futures contract is pricing in about a 50% chance the Fed will lower interest rates to 3.50% at its next meeting, up from a 14% chance at last Wednesday's close.