Big Rally Carries Long Bond Yield to Three-Week Low

Greenspan's focus on higher market rates may make the Fed less inclined to hike, traders reason.
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The long Treasury bond tacked on more than a full point for the second session in a row, after an economic report appeared to bolster

Fed

Chairman

Alan Greenspan's

thesis in a speech last night that rising market interest rates may be working to slow economic growth to a sustainable pace.

The rally took the 30-year bond's yield to its lowest closing level in more than three weeks. The bond's price rose 1 5/32 to 99 14/32, trimming its yield 10 basis points to 6.16%, the lowest yield since Oct. 6.

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Shorter-maturity-note yields, more closely tied to the interest rate set by the Fed, also rallied as traders priced in a smaller likelihood of another rate hike at the Fed's next meeting on Nov. 16. At the

Chicago Board of Trade

, where futures on the fed funds rate are

listed, the odds of a Nov. 16 hike slipped to 60% from 73% yesterday.

In his

speech to the

Business Council

in Boca Raton, Greenspan warned that growth in consumer demand may be outpacing growth in the economy's productive potential, a condition that can lead to inflation.

But, he said, rising market interest rates may be taking care of the problem -- implying, bond-market participants say, that additional rate hikes by the Fed may not be necessary.

That thesis got a major boost this morning, when the September

new home sales

report showed a huge decline. Housing is the quintessential interest-rate-sensitive sector of the economy, and the sharp decline in new home sales confirmed that higher long-term interest rates are slowly but surely working to curb consumer spending. The pace of new home sales fell 12.8% to 811,000 from a revised 930,000 in August.

"There is mounting evidence that interest-rate-sensitive activity is beginning to decline in response to higher borrowing costs,"

Moody's Investors Service

chief economist John Lonski said.

"All the pieces fit together," said Matt Frymier, a note trader at

Banc of America Securities

in San Francisco. "Greenspan said, 'The market's tightening for me, and if it needs to happen again, it'll do it again.'"

The case against a November rate hike is bolstered,

Merrill Lynch

Treasury market strategist Jerry Lucas pointed out, by the proximity of year-end. If Y2K dislocations are more widespread than expected, the Fed might regret having hiked, Lucas said. There's no pressing need for the Fed to tighten next month, so it might as well wait till next year.

But even if the Fed tightens next month, the bond market is nursing the hope that the hike will be the last one for the next few months at least.

Bond mavens are still reluctant to say the bear is dead, though. "I am cautiously optimistic," Lucas said. "But bull corrections do come in longer-term bear markets."

The bond market was also supported today by calendar-related buying. More often than not, bond prices rise on the last business day of the month. Indices that track the market are reconstituted on that day, which triggers buying by fund managers who model their portfolios after indices.