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Treasuries Surrender Early Gains

A rally that was based on optimism the Fed will lower interest rates in the next several months was undone by rising stock prices and lukewarm words from the Fed.

Treasuries ended narrowly mixed, after improvement in the stock market and lukewarm language from two

Fed officials eroded the day's earlier gains.

The U.S. Supreme Court's ruling this afternoon improved Republican candidate

George W. Bush's

chances of prevailing over Democrat

Al Gore

in the presidential election. The decision, which sent the recount issue back to Florida, hurt the bond market mainly by helping the stock market.

The early gains in the Treasury market were due to growing optimism that the Fed will lower interest rates in the months ahead.

The Wall Street Journal

reported in today's edition that the

Federal Open Market Committee will probably change its assessment of the risks facing the economy at its next meeting on Dec. 19, a move that would be seen as the first step in a process that could eventually lead the Fed to lower the

fed funds rate.

The latest economic news was mixed, with some indicating that low long-term interest rates are stimulating the economy and others suggesting that growth will continue to slow.

The benchmark 10-year

Treasury note, which rose as much as 13/32 intraday, finished unchanged at 101 23/32, its yield at 5.518%. Shorter-maturity issues rallied, dropping their yields by 2 to 3 basis points.

The 30-year

Treasury bond fell 10/32 to 108 11/32, lifting its yield by 2.2 basis points to 5.663%.

At the

Chicago Board of Trade

, the March

Treasury futures contract fell 6/32 to 101 29/32.

Still, it was the stock market that continued to be the main influence on Treasury prices. Improving stock prices hurt the bond market by reducing the appeal of bonds as an alternative investment. They also hurt bonds to the extent they are an indication that economic growth will accelerate in the months ahead.

The Supreme Court's ruling in favor of Bush appeared to trigger the stock market rally, and "of course bonds went the other way,"

Dredner Kleinwort Benson

senior market economist Kevin Logan said.

At the same time, Logan said, the bond market views Bush as the less friendly of the two candidates because, to a greater extent than Gore, he would stimulate the economy with tax cuts.

People also sold Treasuries today to lock in gains they had accumulated in recent sessions, which have seen yields drop to their best levels of the year,

market analyst Josh Stiles said. "The market was acutely overbought, and people used the excuse of stock-market strength" to take profits.

Comments by

Richmond Fed


Alfred Broaddus


Boston Fed


Cathy Minehan

were also instrumental in the Treasury market's retreat, analysts said.

Broaddus said he was not worried about an excessive economic slowdown. Minehan issued a reminder that, while the economy has slowed "a bit," the unemployment rate remains extremely low. The low unemployment rate is a hallmark of economic strength.

"None of that is bond-friendly," Logan said. "They seem much less concerned about the state of the economy than the Street does."

Early in the session, Treasuries rallied in response to

The Journal's

report that the FOMC is "leaning heavily toward" changing its assessment of the economy at its next meeting on Dec. 19.

In the

statement it releases after its meetings, the FOMC opts for one of three assessments of the economy. Either the risk of rising inflation is paramount, the risk of slowing growth is paramount, or the two risks are in balance. Since early 1999, the committee has declared inflation the greater risk. It will probably switch to a risks-balanced assessment on Dec. 19, the


story suggests.

Traders of

fed funds futures contracts upped their estimation of the likelihood that the Fed will lower the key short-term lending rate to 6.25% from 6.5% currently by the end of next year's first quarter. The odds implied by the price of the April fed funds futures contract rose to 128% today from 120% on Friday.


The Journal

story did not explain how one could be sure that the FOMC is leaning heavily toward shifting its assessment of the risks facing the economy, bond market professionals are anxious to see whether Fed Chairman

Alan Greenspan, who is scheduled to give a speech tomorrow at 10:45 a.m. EST, will drop a confirming hint.

Economic Indicators

In economic news,

new home sales


definition |

chart |


) fell 2.6% to 928,000 in October, less than they were expected to, from 953,000 in September. Economists polled by


had forecast a larger drop, to 909,000 on average. Mortgage interest rates have fallen sharply since May, aiding the housing sector.


index of leading economic indicators


definition |

chart |


) fell 0.2% in October, in line with expectations. The index has fallen or been unchanged for seven months in a row, portending slower economic growth in the months ahead.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 110.92 yen, down from 111.30. The euro was worth $0.8888, up from $0.8784. For more on currencies, see


Currencies column.

Crude oil for January delivery at the

New York Mercantile Exchange

fell to $31.22 from $32.02.


Bridge Commodity Research Bureau Index

rose to 231.96 from 228.66.

Gold for February delivery at the


rose to $273.80 an ounce from $271.90.