Ergo, here it is......
Date:8/10/2004 2:56:23 PM
Post #of 7510
U.S. Treasuries fall as Fed adamant about growth
By Pedro Nicolaci da Costa
NEW YORK, Aug 10 (Reuters) - U.S. Treasury debt prices
slipped on Tuesday after the Federal Reserve raised interest
rates a quarter-percentage point, but stuck to its message that
recent weakness in the economy was a temporary phenomenon.
Showing unremitting confidence about the nation's growth
prospects despite dismal July employment data, the central bank
said the U.S. economy was poised for a stronger pace of
expansion ahead.
That caught bond traders off guard since many had been
expecting the Fed to soften its commitment to tightening
monetary policy in the face of worsening economic conditions.
"This is negative for the market because the Fed said that
even after these actions, policy is easy," said Joseph
LaVorgna, senior U.S. economist at Deutsche Bank. "That's a
hint that all else being equal, they are still leaning toward
another move in September."
Bonds took the hint, with the benchmark 10-year note
<US10YT=RR> sliding 5/32 in price, lifting its yield to 4.28
percent from 4.26 percent late Monday.
On Friday, yields hit a four-month low of 4.16 percent
after a surprisingly weak July jobs report radically changed
market expectations for future monetary tightening.
As expected, the Fed raised its benchmark federal funds
rate to 1.5 percent from 1.25 percent, the second hike this
year. The central bank acknowledged that the labor market had
slowed, but linked the deterioration in large part to soaring
energy prices.
On Tuesday, U.S. crude futures hit a fresh record high of
$45.04 a barrel, the highest price in the 21 years that oil
futures have been traded on the New York Mercantile Exchange.
To the dismay of bond bulls, the Fed focused on price
stability rather than economic growth in the last part of its
statement.
The current five-year note <US5YT=RR> was down 7/32 in
price, sending its yield up to 3.48 percent from 3.43 percent
on Monday. Last month, the five-year note yielded as much as
3.87 percent.
In a major flattening of the yield curve, the two-year note
<US2YT=RR> lost a hefty 4/32, leaving its yield at 2.52 percent
compared with 2.44 percent on Monday. By contrast, the 30-year
bond <US30YT=RR> rose 5/32, lowering its yield to 5.05 percent
from 5.06 percent.
Looking forward, the market still had to digest another $29
billion of new supply this week, with five-year notes due on
Wednesday and a 10-year offering the day after.
The day's economic data were overshadowed by the Fed
meeting and had little impact on the market, traders said.
U.S. nonfarm business productivity rose a
higher-than-expected 2.9 percent in the second quarter,
suggesting firms were still able to expand production without
taking on many more workers.
Unit labor costs also turned higher and, if sustained,
could eventually feed through to core inflation. On the other
hand, inflation was already high enough to eat into worker
compensation, which rose just 0.1 percent in real terms.
With incomes barely matching inflation, it could be harder
for U.S. consumers to keep spending at the furious pace of
recent years. There was a hint of this in the latest chain
store sales data, which showed a sluggish start to August.
Meanwhile, the IBD/TIPP survey of consumer optimism index
for August showed a slight 0.4-point gain to 57.7, though the
report cautioned that the July jobs numbers could hurt
sentiment going forward.
AI
