Bond prices collapsed today, more than giving back
yesterday's big gain to push yields higher than they've been in months. The day started out badly because of hawkish chatter by the
European Central Bank
chief economist, and only got worse when the
Purchasing Managers' Index
, a key manufacturing sector indicator, set all kinds of records for strength.
The numbers made economists and bond traders reassess the odds of an additional interest-rate hike by the
this year. The Fed's next meeting is on Tuesday, and while most Fed watchers still expect no change in the fed funds rate this month, the idea that Chairman
and the gang will adopt an official bias to hike rates, and then possibly act in November, gained more than a few adherents today.
"It definitely increases the probability that they may go this year," said Jerry Lucas, government bond strategist at
. And "it definitely increases the probability that they will go for a tightening bias on Tuesday."
The benchmark 30-year Treasury ended the day down 1 5/32 at 99 28/32, lifting its yield 8 basis points to 6.13%, its worst close since Aug. 12. Shorter-maturity note yields underperformed, rising anywhere from 10 to 12 basis points.
The carnage started early, when ECB chief economist
was quoted in Europe saying that the risk of rising prices is greater than the risk of falling prices. (Seems obvious enough, but in bondland such pronouncements mean that prices -- of bonds -- may be too high.) Issing's remarks spread "fear of higher rates, fear of growth, and that pressured fixed-income assets,"
economist Joel Kent said.
Then, once the New York session was under way, the Purchasing Managers' Index struck its blows.
The index, which signals manufacturing sector expansion when it's over 50 and contraction when it's under 50, rose to 57.8 in September, the highest reading since November 1994, from 54.2 in August. The consensus forecast of economists polled by
was for a very slight rise to 54.3.
A key sub-index of the report by the
National Association of Purchasing Management
, measuring export orders, rose to 56.6, its highest level since before the Asian economic crisis,
economist Mark Vitner observed in a published comment.
But perhaps most important, a sub-index measuring prices paid by manufacturers for raw materials rocketed to 67.6 from 59.8, stoking fear that rising materials prices will eventually translate into higher prices at the consumer level.
"For a while we had a strong-growth, no-inflation story," said Mike Cloherty, senior market economist at
Credit Suisse First Boston
. "Now we have strong growth and some commodity price pressures. We're not seeing it in final goods at all, and we're not anticipating it," he continued, "but that's raising some fears."
"The mitigating factor,"
chief economist Ken Mayland said in a published comment, "is that this pricing strength may be only narrowly felt, in the form of higher oil prices, which is probably close to being done." Crude oil has risen from under $12 a barrel in March to over $24 at today's close.
Tell it to the bond traders. Or to the fed funds futures traders, for that matter. At the
Chicago Board of Trade
, where those contracts are listed, the odds of an October hike got upped to 29% from 17% yesterday, while the chances of a November hike shot to 95% from 66%.
Economists say the strength of the economic data between now and the November meeting will determine whether the Fed hikes rates, but for now, there's no appetite for taking chances.