U.S. Treasuries traded quietly in the wake of today's selloff in the stock market and the midday speech by
Federal Reserve Governor Laurence Meyer, who said he sees "downside risks" to the recovery thesis and that the economy is likely to remain "sluggish" going into the third quarter.
Government bonds were mixed in recent activity, with the two-year note, which moves most dramatically to expectations of changes in monetary policy, flat at 100 7/32, with a yield of 4.129%. Yields rise when prices fall. The 10-year benchmark note gained 3/32 to 98 1/32, lowering the yield to 5.261%, while the 30-year Treasury bond lost 3/32 to 95 27/32, moving the yield up to 5.664%.
"There wasn't too much of a reaction, " said Sassan Ghahramani, Treasury market strategist at
Medley Global Advisors
. "Meyer came out reiterating the downside risks for the economy, so you still get the idea of a Fed that's cautious. The bigger picture is that these guys are still talking about downside risks."
Roseanne Briggen, market strategist at
, said the governor nevertheless used the "R-word," for recession, which gave the shorter-dated securities "more of a bid." But she added that "he didn't surprise the Street and there would have been more reaction if he were his usual hawkish self. He was a lot less like himself, a lot less Meyer than Meyer usually is."
Two weeks ago, the market took note when Meyer cautioned about the possibility that the Fed could stoke inflationary pressures with its policy of aggressive interest rate cuts. Many compared his comments to
Alan Greenspan's more sanguine view of inflation.
In his speech today, Meyer pointed out that because the current slowdown started from a relatively low level of inflation, "the desirability of a significant decrease in inflation rates is not as great as it has often been in the past."
The bond market is expecting the Fed, which has already slashed benchmark borrowing costs by 250 basis points this year to 4%, to cut rates by at least a quarter-percentage point at its meeting on June 26 and 27. Traders said the bond market will see a period of consolidation over the next few days because of its recent rally. The Treasury market will also be looking ahead to next week's
retail sales report, as well as the
consumer price index and
producer price index, which will help ascertain if inflation is going to be a problem.
"CPI and PPI could be an uncomfortable wild card for the market," said Ghahramani. "The Fed, which has been more conscious about the economy, has been at odds with the market. If
the numbers show an upside surprise, that could change thinking by a lot."