ECI Spanks the Bond Market

The only consolation for the market today was that bonds dug in and found buyers at technical support levels, partially fueled by the daylong equity rout, analysts said.
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Charlie Brown

lying on his back on the pitcher's mound, bonds didn't know what hit 'em today. The name of that screaming line drive is the

Employment Cost Index

, an important measure of labor inflation, and it triggered a massive Treasury selloff. The only consolation for the market today was that bonds dug in and found buyers at technical support levels, partially fueled by the daylong equity rout, according to two analysts.

The ECI, a broad measure of labor costs, rose 1.1% in the second quarter, greater than the


consensus estimate for a 0.8% increase. The report ups the ante on another

Federal Reserve

rate hike at its next meeting Aug. 24. The Treasury market reacted that way today, completely ignoring a


figure that was, at least at first look, a positive for the market.

"If investors were looking for a sign that would suggest the Fed could remain on hold they didn't get it," said Kevin Flanagan, money market economist at

Morgan Stanley Dean Witter


Lately the 30-year Treasury bond was down 27/32 to trade at 88 23/32. The yield rose by 7 basis points to 6.08%. The long bond hit its low of 88 6/32 at 10:44 a.m. EDT, but climbed back, partially because stocks imploded today.

The ECI's 1.1% rise is its greatest increase since the second quarter of 1991. In the first quarter, the ECI rose just 0.4%, a below-trend increase that somewhat balances out today's surprisingly large gain. On a year-over-year basis, the ECI is rising at a 3.2% rate. That's higher than the first quarter's 3% rate, but still below the 3.5% rate at this time last year.

The alarming headline figures in this report, including the 1.2% rise in wages and salaries (vs. 0.5% in the first quarter), are cause for concern. Benefits rose 0.9% during the second quarter, compared with a 0.3% increase the quarter previous. Fed Chairman

Alan Greenspan

warned in his


testimony that labor cost increases "have invariably presaged rising inflation in the past, and presumably would in the future." The Fed's been very concerned about wage inflation, part of the reason it raised the fed funds rate to 5% on June 30.

But the market won't get another read on the ECI for three months, increasing the importance of Aug. 6's July

employment report

, most importantly the average hourly wages and household unemployment figures. "In and of itself this report is not enough to justify an August hike," said Asha Bangalore, economist at

Northern Trust

. "Part of this is because it is a correction from an unusually low reading in the first quarter. The market should look for whether

the employment report confirms the fears the ECI has generated today."

Mike McGlone, vice president at

Aubrey G. Lanston

, said the added weight the employment report takes on leads him to think bonds won't sell off further than today's lows until that report. There are several important economic releases between now and next Friday's jobs data, but McGlone pointed to the buying at technical support as evidence the market sees value at these yields -- until the jobs data proves them wrong.

"The bond has held significant support at 114 20/32," said McGlone, referring to today's low on the September bond futures contract, traded on the

Chicago Board of Trade. The futures contract closed at 115 10/32, down 18/32.

Dennis Hynes, market strategist at

R.W. Pressprich

, added that the market's ability to hold support and bounce a bit on equity weakness proves it'll remain in a "6% to 6.09% range." Don't expect lower bond yields than that, he said, "because I believe we've seen the best of inflation."

The surprising ECI figure blunted the impact of what is, on first look, a bond-friendly GDP report. Second-quarter GDP grew at a 2.3% rate, much smaller than the 3.3% consensus. The inflation components of the report, the implicit price deflator and the price index, both rose at a 1.6% rate, identical to increases in the first quarter.

On the other hand, business inventories tailed off in the second quarter, removing 0.9% from this quarter's GDP growth. What it means is that businesses, already stocking a glut of inventory, let their inventories run down in the second quarter. This isn't a response to a lack of demand: consumption rose 4% during the quarter, and while that's a slowdown compared with 6.7% in the first quarter, it isn't bupkes. Economists already expect inventories to rise in the third quarter, as companies stock up on their products heading into Y2K, so the market didn't take any solace from this figure.

Corporate Bond Prices on the Web

Curious about corporate bond prices?


Bond Market Association

today unveiled a free service on its

Web site that lets investors look up the prices at which investment-grade corporate bonds traded on the previous day.

Starting today, the initiative, dubbed Corporate Trades I, will publish a list of all corporate bond transactions done the previous day by a group of interdealer brokers. The association estimates that interdealer brokers do 30% to 45% of the trades in the corporate bond market, and that the brokers contributing to Corporate Trades I do at least 90% of that volume.

Investors can go to the Web site and ask to see all of the previous day's trades, or only those in a particular sector (banking, for example), and then sort them by maturity, yield, rating or a variety of other characteristics.

Today, the list includes 106 trades. The association estimates that there are 150,000 corporate bonds outstanding.

The service may be of limited use to individual investors because the transactions are quite large and the association isn't providing any guidance on how much more one should expect to pay for a relatively small block of bonds. The transactions are classified by size as being under $1 million, $1 million to $5 million, $5 million to $10 million, $10 million to $20 million, or over $20 million.

Still, the initiative gives investors more free information than previously has been available on corporate bond prices. It represents an effort by the association to answer legislative and regulatory calls for the bond industry to publish trade data to give investors a basis on which to evaluate the prices that dealers quote them.

The association would like to avoid a requirement that all trade data (as opposed to just interdealer trade data) be disseminated on an intraday basis, arguing that it would impair liquidity in a market already short on it. At the same time, the absence of price transparency in the bond markets, particularly to individual investors, helps make the bond business profitable for dealers; if individuals don't know what's a fair price, they can be enticed to pay too much.

When the association

outlined its plans for the project in April, they gave contributors the option of withholding data on up to 10% of their trades. Contributors no longer have that option. Association President Heather Ruth insisted today that that had nothing to do with

Securities and Exchange Commission


Arthur Levitt's

critical attitude toward the project.

Corporate Trades I is comparable to a trade data reporting system the association

introduced for municipal bonds in November.


Elizabeth Roy