Bonds rallied hugely today, pushing the benchmark 30-year Treasury's yield back under 6%, after
let investors know that while at least one interest-rate hike is in the offing, monetary policymakers don't foresee having to raise the fed funds rate more than three times in the months ahead.
Propelled only by Greenspan's
remarks, the long bond soared 1 1/32 to 90 5/32, dropping its yield 11 basis points to 5.96%. Shorter-maturity note yields fell by similar amounts. The two-year note, for example, shed 10 basis points to 5.49% from 5.59%.
In the wake of the Fed chairman's comments to the congressional
Joint Economic Committee
, bond market mavens are in broader agreement than ever that the
Federal Open Market Committee
, the Fed's monetary policy body, will raise the fed funds rate from 4.75% to 5% at its next meeting on June 29-30. Who could disagree? In what
chief economist Nicholas Perna called "the most candid testimony I've ever heard him give," Greenspan signaled the move with the words: "When we can be preemptive we should be, because modest preemptive actions can obviate the need of more drastic actions at a later date that could destabilize the economy."
Beyond the repeal of one of the three rate cuts that were administered last fall to massage financial markets that had seized up after Russia defaulted on its foreign obligations, there's much less agreement about what the Fed might do in the months ahead.
"He wasn't clear at all" on that point, said Mark Mahoney, Treasury market strategist at
Warburg Dillon Read
. "People were braced for: 'Stand by for a lot of tightenings.' Instead they got: 'We're going to do 25 at the end of June, and then we're going to think about it.'"
Others are more certain that the first hike will be followed by at least one more.
Greenspan's early reference to the conditions of last fall that prompted the rate cuts and the extent to which they have receded suggests strongly that that's the case, Perna thinks. He puts the odds of a second hike in August at 75%, and the odds of a third in October at slightly better than even.
People who think the Fed might only hike once, as it did in March 1997, are engaging in wishful thinking, Perna says, noting that "extraordinary circumstances" prevailed at the time. Namely, inflation, which had been rising, suddenly started going the other way.
Scott Graham, co-head of government bond trading at
, has similar odds for the first two possible moves, but slimmer ones on the third. "They're going to take a long, hard look, and the timing will coincide with not wanting to do much in front of Y2K," he said.
But as important as the number of rate hikes that lie ahead is the general sense of command of the inflation situation that Greenspan communicated, Graham said. "He said exactly what the Street wanted to hear: The Fed's ahead of the curve, not behind it."
Still, the size of the bond market's move was surprising to some, who'd predicted the bond would have trouble pushing its yield through the 6% level. "We were expecting the market to do better on that type of speech, but we didn't think it would do
much better," Mahoney said. The size of the move testifies to the amount of money that had piled up on the sidelines over the last couple of weeks, as investors waited first for a series of key economic reports (
Producer Price Index
Consumer Price Index
) and then for Greenspan, before jumping back in, he said.
Graham said the Treasury market defined a new range today, with a 5.90% yield on the long bond defining the top and a 6.10% yield marking the bottom. At the low-yield end, corporate issuers will tap the market, dimming Treasuries' appeal, he said.
Next up for the bond market: The rate hike itself, and what the Fed has to say in the statement that traditionally accompanies any change in rates.