Bonds Advance Slightly on Modest Improvement in Fed Outlook

A demurral by the Bank of England, and hope for one by the Fed in February, kindle a bit of optimism.
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Bond prices are a touch higher this morning on relief that the

Bank of England

left its key interest rate unchanged, and on a rumor that a secretive Washington consulting firm says the

Fed

will maintain its neutral stance on interest rates at its Dec. 21 meeting.

A

coupon pass by the Fed is also giving the market a slight boost.

The benchmark 30-year Treasury bond was lately up 5/32 at 98 24/32, its yield unchanged at 6.22%. Shorter-maturity note yields were a basis point or two lower on the day.

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But with no major economic indicators slated for today and the

Producer Price Index out tomorrow morning, volume is light and interest in Treasuries is weak. The corporate new-issue calendar continues to put on the liveliest show in bondland. Today's highlight was

Freddie Mac's

(FRE)

pricing of a $3 billion 10-year note earlier this morning.

The Bank of England's

decision to leave its repo rate unchanged at 5.5% was expected, but with Fed fears running high, it was greeted with relief nonetheless. "There was some risk had they raised the rate, a question mark would have been raised about the Fed," said Richard Gilhooly, senior bond strategist at

Paribas Capital Markets

.

Meanwhile, the rumor of the day is that the D.C. consulting firm

Johnson Smick

, which never even confirms it has issued a report, is predicting that the Fed will keep its neutral monetary policy stance at its next meeting. That would presumably make the Fed less likely to hike the fed funds rate at its following meeting, on Feb. 1-2.

With the

fed funds futures pricing in a 71% chance of a February rate hike (down from 75% yesterday), many people expect the Fed to shift to a tightening stance this month, in preparation for the hike.

Today's only monthly economic release was negative for bonds.

Import and export prices rose in November, with more important import prices gaining 0.5%. Also, import prices excluding oil rose 0.3%, their largest gain since September 1996. The year-on-year pace of import price growth reached 5.5%, its highest level since May 1995. Imports excluding oil are still down year-on-year, at -0.2%, but that is the fastest pace since April 1996.