Bonds, Knocked Down Overnight, Haven't Gotten Up

Weak international bonds and hawkish comments by a European Central Bank official are sending yields to new highs.
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Weakness in global bond markets has Treasuries tumbling this morning, as the 30-year Treasury bond has reached its highest yield since October 1997.

European Central Bank

chief economist Otmar Issing scared the market by voicing concerns about price inflation, but analysts said technical factors were more to blame.

Of late, the 30-year Treasury bond was down 19/32, trading at 96 14/32. The yield swelled 5 basis points to 6.39%; earlier it reached 6.40%, its highest since closing at 6.42% on Oct. 22, 1997.

"Friday was a failure," said Mike McGlone, a vice president at

Aubrey G. Lanston

. "The market opened up on strength and closed on weakness, and as we walked in this morning there was a global bond selloff."

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Message Boards. Overnight, the yield on 10-year German Bunds rose to 5.46% from 5.40%, and 10-year British gilts rose to 5.84% from 5.73%. Traders sold Treasury bonds in sympathy with these markets, McGlone said, and light volume exacerbated the move. But Treasuries have been unable to recover since the market's U.S. open, instead weakening on technical pressure.

The December bond futures contract, traded on the

Chicago Board of Trade, is at its all-time low today, currently trading at 110 15/32, down 16/32. McGlone believes the futures will have to drop to 110-even before dealers begin to support the market.

Issing said inflation risks are rising in Europe, adding that he expects growth in Europe to strengthen considerably. With growth in Europe on the risk, the ECB is under pressure to raise the refinancing rate (its version of the fed funds rate), currently 2.5%. These remarks reinforce the opinion of those who believe the ECB will indeed raise rates at its next meeting on Nov. 4.

But Will Lloyd,

Barclays Capital's

head of market strategy, said few were attributing the Treasury weakness to Issing, who expressed similar thoughts a few weeks ago. The selling in bonds reflects increased fear of higher inflation. The market will get a good read on wage inflation Thursday, when the third quarter

Employment Cost Index

is released.

Today's only monthly economic release, sales of

existing homes

, fell 2.1% to a seasonally adjusted annual rate of 5.13 million in September, from an adjusted 5.24 million rate in August.

The fed funds futures contracts listed on the

Chicago Board of Trade

are currently pricing in a 81.4% probability of a

Fed

rate hike, from 5.25% to 5.5%, at its next meeting on Nov. 16. Friday, the November fed funds contract was pricing in a 64.3% chance of a rate hike.