Bonds Feast on Fed Leftovers

Even an overwhelmingly strong durable goods report can't keep bonds from rallying.
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The Treasury market is rallying swiftly this morning, pushing the benchmark 30-year Treasury bond to a level last reached on July 20. Yesterday's neutral-sounding statement that accompanied the

Fed's

rate hike has given another boost of optimism to the bond market, which in the last two weeks has turned around the year-long bear market, if only for a short time.

Even this morning's exceedingly strong

durable goods

report was turned into wine today, as traders ignored the 3.3% rise in new orders for July. Lately the 30-year Treasury bond was up 22/32 to trade at 103 11/32, pushing the yield down by 4 basis points to 5.89%.

"There's a lot of people reading into the Fed's statement the possibility that this may have been the last rate hike of the year. The market continues to do better following yesterday's lead," said Marcello Frustaci, senior vice president at

Daiwa Securities

. Frustaci added that some technical buying was also responsible for the rally.

Yesterday, the

Federal Open Market Committee

raised its target for the fed funds rate to 5.25% from 5%, as expected. However, in its

statement, the Fed said, "Today's increase in the federal funds rate, together with the policy action in June and the firming of conditions more generally in U.S. financial markets over recent months, should markedly diminish the risk of rising inflation going forward." The Fed meets three more times before the end of the year, and it is presumed they do not want to raise rates when the financial markets are feeling the effects of Y2K, basically ruling out the Dec. 21 and Nov. 16 meetings. The Fed next meets Oct. 5, but at that time, the Fed will have only one more month of economic releases to consider.

The market sloughed off the 8:30 a.m. EDT durable goods release, which was strong in just about every aspect. The rise in business investment in this month is an early indication that economic growth should be strong in the third quarter. Economists expect that business inventories will build up in the months leading up to Y2K, but William Sullivan, chief money-market economist at

Morgan Stanley Dean Witter

, said it is "too early to determine whether a Y2K consideration is at work, but it's something to keep in mind."

"It strongly suggests real

GDP

in the July-September period could be appreciably above the growth rate for the second quarter," Sullivan said. "It bespeaks to some acceleration, that after a real sluggish performance, order bookings kicked in in July."

Durables rose 3.3%, compared with a revised 0.5% increase in June and the

Reuters'

consensus forecast for a 1% increase. Excluding transportation equipment, new orders rose 3.7%, while the estimate was for just a 1.1% increase. The June figure was revised to a 0.3% increase from an original 0.4% decline. Most components of the report were strong: orders for industrial machinery rose 8.4%, while primary metals orders rose 2.4%.

Sales of

existing homes

fell 3.9% in July to a seasonally adjusted annual rate of 5.41 million, the

National Association of Realtors

said today. The June sales rate was revised upward to 5.63 million.