Treasuries Fall Again -- This Time Fed Speakers Are to Blame

Nothing new came out of the Fed officials' speeches, but that didn't stop traders from selling on them in a thin session.
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Without any economic data to kick the bond market in the head, a couple of

Fed

presidents rose to the occasion instead. Analysts said none of the concerns voiced by any of the officials represented new, alarmist points of view, but the speeches were enough to knock down the gloomy bond market in the afternoon of a thinly traded session.

"These seem to be more generic speeches addressing specific topics such as productivity," said William Sullivan, money-market economist at

Morgan Stanley Dean Witter

. "I don't get the impression they're trying to

tell investors that they're moving interest rates."

Until these speeches hit the newswires, the bond market was conducting an air raid drill: hunker down, and wait and see what kind of bomb the

Employment Cost Index

drops on Thursday. Lately the 30-year Treasury bond was off 11/32 to 96 20/32. The yield rose 3 basis points to 6.38%.

"We're in this tight range until ECI, and until then we're not going much further," said Roseanne Briggen, market strategist at

MCM Moneywatch

.

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Sullivan blamed the selling on the endemic weakness that currently exists in the bond market. The market began to tail off in the early afternoon, before the Fed speeches took bond prices down by a few more ticks. Treasuries are in a defensive mode until the important third-quarter ECI figure, as well as the third-quarter GDP release. If the last few weeks of trading are any indication, the market may remain on edge until the Fed's next meeting, Nov. 16.

After today's speeches, the November fed funds futures contract listed on the

Chicago Board of Trade

was pricing in a 72.9% probability of a

Fed

rate hike, from 5.25% to 5.5%, at its next meeting on Nov. 16. Yesterday, the November contract was pricing in a 68.6% chance of a rate hike.

The most hawkish speaker was Richmond Fed President

Al Broaddus

, not a voting member of the

Federal Open Market Committee

this year. He reiterated the belief of many that the current pace of demand is "not sustainable," adding that an overheating in the economy is "a material risk in the outlook that needs to be taken seriously."

San Francisco Fed President

Robert Parry

spoke in the state of Washington today, playing the on-the-one-hand, on-the-other-hand act. "We face the risk of building inflationary pressures," he said, but he added that a continuation of fast productivity growth could "mitigate" those pressures.

"Ideally, the Fed would tend toward the more preemptive end of the spectrum, because of the long lags between policy actions and their effects on the economy," added Parry, also not a voting member.

"We haven't gotten a definitive bias in this public commentary," Sullivan said. "It doesn't seem as if these Fed officials in unison are trying to steer the markets' thinking."

Tomorrow's only monthly economic release is September's

durable goods

report. Economists polled by Reuters expect a 0.4% decrease in durables orders, following a 1.2% increase in August. The

Treasury Department

will auction $15 billion of two-year notes in the afternoon.

Separately, economists are already gunning for a huge increase in October nonfarm payrolls when the

employment report

is released Nov. 5.

Salomon Smith Barney

today said it is estimating payrolls will increase by 525,000. Brian Jones, economist at Salomon Smith Barney, said seasonal adjustment factors and a payback for unexpected job losses due to Hurricane Floyd are the chief reasons for the bold estimate. Nonfarm payrolls fell 8,000 in September.