Treasuries rallied for the third day in a row, dropping most yields to new lows for the year, thanks to a report showing that inflation remains under control at the wholesale level, and to sagging stock prices. Both factors fed the growing sense that economic growth is slowing, and that the Fed will eventually lower interest rates in order to prevent it from slowing too much. Bond prices typically rise under those conditions. "It's a pretty good environment for fixed-income products," said Joe LaVorgna, senior U.S. economist at Deutsche Bank Securities. "There's not a lot of inflation, and the economy's slowing, the global economy's slowing. It all fits." The benchmark 10-year Treasury note rose 11/32 to 104 1/32, lowering its yield 4.7 basis points to 5.213%, the lowest since April 1999. The 30-year Treasury bond rose 17/32 to 111 27/32, dropping its yield 3.5 basis points to 5.437%, the lowest since February 1999. At the Chicago Board of Trade, the March Treasury futures contract rose 14/32 to 104 17/32. The increase in prices at the wholesale level was in line with expectations. The Producer Price Index ( definition | chart | source ), which measures prices paid by businesses for goods, rose 0.1%. The annual rate of increase of producer prices held steady at 3.6%. However the core PPI, which excludes food and energy prices, was unchanged. Economists polled by Reuters predicted it would rise 0.1%, on average. Its annual rate also held steady, at 1%. Steady inflation rates are important to bond investors because bonds make fixed payments that lose value as inflation increases. Also, the Fed would be reluctant to lower interest rates if inflation were rising, because the economic activity created by lower rates could cause inflation to rise even more. Tomorrow will bring a broader measure of inflation, the Consumer Price Index ( definition | chart | source ), which tracks goods and services at the consumer level. Treasuries reached their session highs even before the PPI was released, as traders reacted to a rumor that the report was even weaker than it turned out to be, said John Casey, government bond trader at Prudential Securities. The conclusion last night of the presidential contest also played a role in the rally, though not the one many were expecting. Because George W. Bush, the victor, is expected to run smaller federal budget surpluses than Al Gore, the vanquished, would have, Bush's election has been seen as a negative for the Treasury market. Surpluses have been good for the Treasury market because the government has used them to pay down debt, which takes the form of Treasury securities outstanding. The smaller supply of Treasuries has helped increase their market value. Today's rally smacked of short-covering by traders who'd sold Treasuries in recent days based on the assumption that Bush would eventually prevail, said Gib Clark, manager of electronic trading at Zions First National Bank. The stock market selloff also stoked demand for Treasuries, both as an alternative investment, and because falling stock prices are an indication that investors expect economic growth to continue to slow. Investor optimism about the prospect that the Fed will lower interest rates in the next few months reached new highs, as measured by the prices of fed funds futures . The odds that by February the Fed will lower the rate to 6.25% from 6.5% currently, for example, rose to 112% from 98%. Treasury-market watchers say yields are already so low relative to the fed funds rate that it is difficult to imagine them going any lower. But at the same time, they observe, people have only gotten hurt betting against the Treasury market, as sentiment about the economy and the Fed evolves in its favor. "I do believe the market's overbought, but you're afraid to make a sale," Prudential's Casey said.
In other economic news, initial jobless claims ( definition | chart | source ) fell to the lowest level in six weeks, indicating that demand for workers has increased. First-time claims for unemployment insurance fell to 320,000 from 352,000 the previous week. But the four-week average of initial claims, which smooths out week-to-week volatility, dropped only slightly from the 28-month high it reached last week. The average fell to 343,250 from 345,250. Business inventories ( definition | chart | source ) rose 0.6% in October, while sales fell 0.2%. The annual rate of inventory growth, 7%, exceeded the rate of sales growth, 6.2%, for the third month out of the last four. That suggests that inventory accumulation, a component of economic growth, will slow as businesses wait for sales to catch up.
Currency and Commodities
The dollar fell against the yen and the euro. It lately was worth 112.02 yen, down from 112.36. The euro was worth $0.8916, up from $0.8766. For more on currencies, see TSC's Currencies column. Crude oil for January delivery at the New York Mercantile Exchange fell to $27.99 a barrel from $28.74. The Bridge Commodity Research Bureau Index fell to 226.09 from 227.32. Gold for February delivery at the Comex rose to $271.50 an ounce from $271.20.