Conforming to precedent, Treasury prices moved further in the same direction they took yesterday in response to
Alan Greenspan's Humphrey-Hawkins
testimony. Unfortunately, that direction was down in price, up in yield.
With little else to guide them on an economic-data-free summer Friday, the benchmark 30-year Treasury bond and shorter-term notes drifted to their highest levels since the first week of the month.
The long bond lost 22/32 to 89 11/32, lifting its yield 6 basis points to 6.03%, the highest level since July 6. Shorter-maturity note yields rose by roughly similar amounts.
The dollar's continuing slide against the yen -- it has fallen 3.8% from 120.99 to 116.36 since last Friday -- provided some investors with an excuse to bail out of Treasuries. But given that it has become normal in recent years for the market to continue moving in the same direction it took on the day of the testimony over the next several days, today's move wasn't the least bit unusual in any case.
Greenspan's Humphrey-Hawkins congressional testimony yesterday triggered a bond-market selloff because it emphasized the possibility that the Fed will raise interest rates again, perhaps as soon as next month. The Fed's monetary policy committee, the
Federal Open Market Committee
, has its next scheduled meeting on Aug. 24.
In the weeks since the Fed raised the fed funds rate to 5% from 4.75%, market sentiment had shifted markedly, from tempered fear that there would be a second hike in August, to cautious doubt. The neutral policy bias the
announced on June 30 combined with the benign readings from the June
Consumer Price Indices
guided the shift.
Testifying before the congressional
Joint Economic Committee
on June 17, Greenspan made as clear as he's ever done, Fed watchers say, that the FOMC would hike rates on the 30th.
While he was not as clear yesterday about the likely outcome of the Aug. 24 meeting, Greenspan certainly put the fear of the Fed back into the market.
"I don't think a rate hike on Aug. 24 is a foregone conclusion, but Greenspan's very hawkish tone worries me greatly," said Maryann Hurley, a trader at
in Seattle. "He told us
a rate hike was coming, he just didn't tell us when."
Whether it comes next month will depend on key economic reports scheduled for release between now and then (assuming Greenspan doesn't backtrack on yesterday's comments in part two of Humphrey-Hawkins on Wednesday, which would be unusual). There are a lot of them.
Employment Cost Index
productivity and unit labor costs
the following week,
and the PPI the week after that, and finally the CPI and
on Aug. 17.
"They're going to look for a general uptrend in those numbers to push it," Hurley said, adding that the
, a component of the employment report, will be particularly important. "If you see it decline, that's going to raise a red flag for the Fed."
Mike Cloherty, market strategist at
Credit Suisse First Boston
, is "not looking for any real scorching hot reports, but they're going to be a little stronger than we saw this month, and I do think we will get enough to trigger another 25-basis-point move in August." Higher energy prices will show up in the overall CPI and PPI numbers, he said, and recent heat waves will goose the utility component of the industrial production report.
The calendar may make an August hike likelier than it would otherwise be. For months some bond market mavens have been arguing that the Fed probably wants to avoid hiking rates in the final quarter before the turn of the millennium. The August meeting is the last one before Oct. 1. "The asymmetry suggested by Y2K uncertainty makes the case for another rate hike now even stronger,"
High Frequency Economics
chief U.S. economist Ian Shepherdson wrote to clients. "A rate increase which turns out to be a mistake will be easy to reverse later this year, but it will be very difficult to act in the opposite case. If rates remain on hold but growth remains too fast, we just cannot see the Fed raising rates in say, November."
Even if the Fed winds up not hiking rates again in August, Cloherty predicts a tough month ahead for the Treasury market. "After that Humphrey-Hawkins testimony, the market's tolerance for even a single bad number is going to be greatly diminished," he said.