Bonds Rally, Taking Cues From Europe

Bond yields in the U.S. are easing, just as their U.K. and German counterparts did. But few are placing huge bets ahead of the ECI.
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Treasury bonds are up smartly this morning, buoyed by a strong rally in European bond markets. A weaker-than-expected

durable goods

report helped sustain the rally in the early part of the U.S. trading session. Traders said the buying is helping to alleviate some of the excess negativity that worked its way into the market during the last few days, even as the market prepares for the potentially unfriendly third-quarter

Employment Cost Index

tomorrow.

"The sentiment was so negative," said Maryann Hurley, vice president at

D.A. Davidson

in Seattle. "We've gotten a little overdone

with selling and so we're seeing some buying going on."

Of late, the 30-year Treasury bond was up 11/32 to 96 30/32, recovering some of yesterday's losses. The yield dropped 3 basis points to 6.35%.

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Message Boards. Durable goods orders fell by 1.3%, weaker than the 0.4% decline expected by economists. But this release was only a mild contributor to a rally that began in Europe. Money supply grew by 6.1% on an annual rate in the eurozone for September, outpacing economists' expectations for 5.8% growth, and besting August's 5.7% growth rate.

The growth seems to have convinced European fixed-income participants that the

European Central Bank

will act to stem the potential rise of inflation by raising interest rates at its next meeting Nov. 4.

"The ECB is going to tighten within the coming weeks," Hurley said. "Whether it's at the Nov. 4 meeting or after the

Fed

meeting

Nov. 16, it's just a question of when."

Ten-year British gilts rallied, dropping the yield to 5.65% from 5.76% yesterday, and 10-year German Bund yields fell to 5.33% from 5.42% yesterday.

Durable goods orders were down 1.3% in September, following a 1% increase in August and a 4.3% rise in July. Excluding transportation orders, durable orders fell 0.5%.

But tomorrow's ECI, an important measure of wage inflation, has had the market in more or less a watch-and-see mode for the bulk of this week. The consensus estimate as polled by

Reuters

calls for a 0.9% increase, which traders believe the market is prepared for. A greater-than-expected rise could spell trouble.

"At 6.35% to 6.40%, that seems to be pretty good support on the cash bond," said Bill Hornbarger, Treasury market strategist at

A.G. Edwards

. "We were oversold on a short-term basis and people were looking for an excuse to buy. But I don't think anybody wants to do much" before the figure.

Comments from Fed speakers make it seem likely the Fed could raise the funds target come Nov. 16. Boston Fed President

Cathy Minehan

, a more dovish district president, told an audience in Massachusetts today that the economy needs to avoid "the excesses of zeal and overconfidence that have ended so many expansion periods in recent U.S. history." Her cautious remarks echo recent concerns voiced by Richmond Fed President

Al Broaddus

and St. Louis Fed head

William Poole

yesterday. Minehan is not a voting member of the

Federal Open Market Committee

this year.

The fed funds futures contract listed on the

Chicago Board of Trade

was lately pricing in a 72.9% probability of a Fed rate hike, from 5.25% to 5.5%, at its next meeting on Nov. 16, identical to yesterday.