Treasuries Lose Ground a Day After Fed Reduces Short-Term Rates

By Yi Ping Ho ,

Government-issued fixed-income securities weakened a day after the

Federal Reserve reduced interest rates by

a quarter-point, as bond investors reacted to the latest economic data and the recent rally in the stock market.

The two-year Treasury note recently fell 5/32 to 99 12/32, yielding 4.197%. Yields and prices move in opposite directions. The two-year note, which tends to react most dramatically to changes in monetary policy, fell immediately after the Fed announcement at 2:15 p.m. EDT Wednesday.

The 10-year benchmark note recently tumbled 10/32 to 97 27/32, raising the yield to 5.288%. The 30-year Treasury bond dropped by 15/32 to 95 30/32, yielding 5.659%.

"The market's trading heavily on the 25-basis-point cut, which wasn't a total disappointment as Wall Street was split 50-50. But 25 basis points didn't help matters at all," said David Winter, a bond trader at

Zions First National Bank Capital Markets

.

At 3.75%, the

fed funds rate is now at its lowest level since May 1994. The latest quarter-point move appears to signal the aggressive easing cycle the Fed started on Jan. 3 this year is nearing an end. Yet there are those who see room for

more cuts this summer.

Dealers also said investors were pressured to sell Treasuries because of the strength in stocks. News that a U.S. Appeals Court

overturned a ruling that would have broken up

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heartened the stock market, even though equities were strong before the decision became known.

"The market's going to be very volatile on the downside on any news showing growth in the economy," said White, adding that today's weekly

initial jobless claims

report, which came in above expectations, also provoked the downswing in Treasuries. "

And if you see inflation, there's going to be more volatility," White said.

The Fed downplayed inflation in its statement yesterday, saying "the associated easing of pressures on labor and product markets are expected to keep inflation contained." Still, there are reasons to believe higher prices could

appear.

In the meantime, the market will weigh the latest economic reports against Fed speeches. Chairman

Alan Greenspan is scheduled to deliver a speech tonight in Chicago on the impact of energy on the economy. Falling energy prices are a boon for the economy, as they help consumer spending and provide relief to businesses.

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