Bonds suffered through their third consecutive poor session, as dealers continued to sell following the
interest-rate hike. Technical reasons were still a factor, but the strength of the
Philadelphia Fed's index
and the recent rise in oil prices were the most direct catalysts for today's weakness.
"The Philly Fed index and the price component numbers came in a little stronger
than expected, and that's overhanging a market that's not traded very well in the last couple of days," said Bill Hornbarger, fixed income strategist at
This myriad of factors had the 30-year bond market lately at 99 13/32, down 14/32, bringing the bond's yield up to 6.17%, a 4-basis point rise. The market has overall traded poorly since the Fed hiked the fed funds rate to 5.5% from 5.25% Tuesday, a move largely anticipated by the market.
Initially, sources attributed the selling to players playing the 'buy the rumor, sell the news' game. They were taking profits on a rally that started three weeks ago with the 30-year yield close to 6.40%. The rally marked a shift in year-long bearish sentiment, as market participants believed a rate hike would help quell inflation, and that the economy would begin to slow heading into the end of the year.
The market's feeling a little less warm and fuzzy this week. The rise in oil prices, and the economic figures released indicated to some that inflation is still a threat. While the Fed will most likely remain on hold for the rest of 1999, a February or March rate hike shouldn't be counted out.
"The sentiment had shifted to bullishness, maybe a little too quick too soon," said Mike McGlone, vice president in trading at
Aubrey G. Lanston
. "The markets have a tendency to punish those attitudes."
Oil prices did fall today, to $25.76 from $26.60 yesterday, but that's still more than $2 per barrel higher than two weeks ago. Ministers of OPEC countries stated most recently that they are committed to maintaining production cuts through March, as originally agreed, although that may be reevaluated after winter in the northern hemisphere. There's been rumbling that OPEC will try to extend the agreement past March, and that's driving the market's fear of higher inflation.
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Steadily rising oil prices directly affects producers, though those higher costs won't necessarily be passed on to the consumer. What consumers will face is a potential rise in heating fuel and gasoline prices. McGlone doesn't have faith in a bond rally with the price of oil near three-year highs.
"Oil is not as significant as it was in 1973, but it will affect the
Producer Price Index
Consumer Price Index
," said McGlone. "The one factor in riskless securities is inflation. Oil maintaining above $26 is a problem."
index, a survey of manufacturing activity in the Mid-Atlantic region, rose to 15.8 in November, greater than the
expectation for a reading of 9.7. The index stood at 6.9 in October. The Philly Fed's prices paid index rose to 24.8 in November from 22.5 in October, indicating that manufacturers are paying more for materials -- that's potentially inflationary.
Today's 8:30 a.m. EST release of the
didn't arouse any emotion. The trade deficit widened to $24.41 billion in September, from $23.55 billion in August. Imports rose 0.1% while exports fell 0.9%.
The Federal Reserve released minutes at 2 p.m. EST from its Oct. 5 meeting, when it adopted a bias toward raising rates (borne out on Tuesday, obviously). The minutes state that the members believed that the chance of Y2K disruptions were diminished enough to potentially raise rates later in the year. None of the members voted against adopting a tightening bias.