Skip to main content

It's official. The Treasury market has lost its mind. Again.

A negative surprise by the

Consumer Price Index


definition |

chart |


), the broadest measure of inflation, failed to elicit any reaction at all. Instead, in action reminiscent of the Fall 1998 meltdown, bond investors focused exclusively on the (admittedly spectacular) action in the stock market.

As the major stock proxies plunged in early action, most Treasury yields plunged to their lowest levels of the year. People buy Treasuries as stocks fall in part because the bond market is a haven where wealth is far less quickly and easily destroyed. Also, falling stock prices are seen as an indication that economic growth will slow as consumers cut back on their spending because they feel less wealthy.

Then, as stocks clawed their way back to end down only substantially (as opposed to horrifically), Treasuries surrendered most of their gains to end mixed. Only the five-year note posted a new low yield for the year.

The benchmark 10-year

Treasury note, after trading up as much as 29/32 at about 9:45 a.m. EDT, finished down 3/32 at 100 13/32, lifting its yield 1.4 basis points to 5.694%.

Shorter-maturity issues fared better, as they typically do in action that is driven primarily by flight from stocks, since they are the most liquid. The two-year note gained 3/32, dropping its yield 4.3 basis points to 5.826%, matching its best level of the year. The five-year note rose 4/32, lowering its yield 3.5 basis points to 5.642%, the lowest since August 1999.

The five-year note is enjoying strong demand because it generally outperforms a combination of two-year notes and 30-year bonds in times when the

yield curve is steepening, as it has been lately.

The 30-year

Treasury bond finished up 3/32 at 106 28/32, trimming its yield a fraction of a basis point to 5.762%.

At the

Chicago Board of Trade

, the December

Treasury futures contract fell 2/32 to 100 1/32.

The fact that the Treasury market didn't give a second thought to a hotter-than-expected inflation report "shows that the Treasury market doesn't have a mind of its own,"

Credit Suisse First Boston

Treasury market strategist David Ging said.

The CPI numbers "were certainly worse than expected, but we won't see much of an impact till the equity markets settle down," Ging said. "For the time being, it doesn't matter."

The CPI rose 0.5% in September, its biggest gain since June and 0.1 percentage points more than economists polled by


expected it to, on average. And while a 3.8% gain in energy prices was largely responsible, the core CPI, which excludes food and energy, also rose more than expected. The 0.3% gain was the biggest since March, and 0.1 percentage points bigger than expected.

The annual rate of increase of the overall CPI rose to 3.5% from 3.4%, but remains below its March peak of 3.8%. The core CPI's annual rate held steady at 2.6%, the fastest since April 1997.

There is a school of thought that says the high energy prices that are swelling the inflation numbers will ultimately slow the economy, leading to lower prices and ultimately, interest-rate cuts by the Fed. But the initial reaction to higher inflation ought to be lower bond prices, market professionals say.

Without the fireworks in the stock market, "I think

the Treasury market would have been a little bit lower because the CPI was higher than expected,"

A.G. Edwards

bond market strategist Michael Maurer said. "But bonds are now in a completely reactionary mode. We're moving in lockstep with equitieis, and that's probably going to be the case till equities find some stability."

Economic Indicators

In other economic news,

real earnings


definition |

chart |


) fell 0.1% in September as a 0.6% increase in the CPI for urban wage earners offset the 0.5% increase in average weekly earnings from the September

employment report.

Housing starts

housing starts


definition |

chart |


) edged up to 1.530 million in September from 1.525 million in August. But building permits surged 1.3%, their biggest increase in eight months, to 1.506 million.

The weekly

Mortgage Applications Survey


definition |

chart |


) detected increases in both refinancing and new mortgage activity. The Refinancing Index rose to 498.6 from 475, while the Purchase Index rose to 311.1 from 302.8.

Currency and Commodities

The dollar fell modestly against the yen and rose sharply against the euro. It lately was worth 107.80 yen, down from 108.00. The euro was worth $0.8390, down from $0.8550. For more on currencies, see


Currencies column.

Crude oil for November delivery at the

New York Mercantile Exchange

rose to $33.70 a barrel from $33.08.


Bridge Commodity Research Bureau Index

fell to 228.88 from 229.92.

Gold for December delivery at the


fell to $272.60 an ounce from $273.40.