Treasurys in free fall as Fed decision looms
Strong inflation reading in factory report sours mood
By Rachel Koning, MarketWatch
Last Update: 12:47 PM ET Nov. 1, 2005
CHICAGO (MarketWatch) - Treasurys lost ground Tuesday as renewed inflation jitters in a manufacturing report put even more emphasis on the tone of the Federal Reserve's statement to be released in conjunction with what is widely expected to be the central bank's 12th straight interest-rate hike.
That statement, due around 2:15 p.m. Eastern time, might clue the bond market in on just how far the Fed thinks it needs to go to snuff out inflation. Higher rates tend to put the bond market on the defensive, but a sense that the Fed will continue to stay a step or two ahead of inflation could help those longer-term Treasury maturities that lose value to inflation.
For now, inflation uncertainties loom, forcing bond prices down and yields higher. Higher yields partly compensate investors for inflation risk.
Near midday, the benchmark 10-year government note was 6/32 lower at 97 13/32, shaving more than $1.25 per each $1,000 worth of securities from its value.
The drop in price lifted its yield ($TNX:
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FinancialsMore $TNX$TNX, , ) , a reference for mortgage and corporate borrowing, to 4.58% vs. 4.55% Monday.
The Fed is seen lifting its fed funds target to 4% from 3.75%, leaving it at the highest since June 2001. "The Oct. 24 nomination of Ben Bernanke as Fed Chairman [Alan] Greenspan's replacement has steadily increased market expectations for future rate hikes," said John Kosar, director of research at Asbury Research in Chicago.
"However, the most influential factor on fed policy expectations during the past two months has clearly been the quick shift to inflations fears, from previous fears of a hurricane-driven economic slowdown."
The 2-year note, which because of its short lifespan is more directly impacted by the Fed's changes to short-term rates, was down 1/32 at 99 22/32. It was yielding 4.41% vs. 4.39%. The 30-year bond fell 11/32 to 108 23/32, yielding 4.78% vs. 4.76%.
Weakness in global equities and gains for global bonds allowed Treasurys to tack on small price gains in very early trading Tuesday. The market has largely consolidated since 10-year yields hit six-month highs around 4.6% late last month. See Market Snapshot. Tuesday's gains reversed in step with the release of the latest Institute for Supply Management manufacturing gauge. It showed that factory activity in the United States slowed a bit in October after a strong increase in the previous month, but not as much as expected.
The ISM index inched lower to 59.1% in October from 59.4% in September. The consensus forecast of estimates collected by Marketwatch was for the index to slip to 57.2%. The index had jumped from 53.6 in August. Readings above 50 indicate expansion. Key for the bond market, the price index soared to 84% from 78%. This is the highest price level since May 2004. See Economic Report.
The Fed has said that higher inflation, bumping around at the high end of the bank's comfort zone, necessitates an interest-rate target closer to neutral, that is not stimulating or slowing growth. The Fed has said its policy remains accommodative. Through Monday, Chicago Board of Trade federal funds futures contracts were fully pricing in 25-basis-point hikes at today's meeting and at the Dec. 13 and Jan. 31 meetings.
Less certain is what the Fed might say Tuesday. "If the Fed hikes and removes 'accommodative,' this could generate a positive response in the equity market because it would signal to investors that the Fed believes that the fed funds rate is either at or close to neutral," said Tony Crescenzi, chief bond market strategist with Miller Tabak & Co. "By signaling a near end to rate hikes on a day that it raises interest rates, investors would also be cheering the Fed's vigilance on inflation based on its past actions and because the Fed would not yet have committed itself fully to ending its hikes before the all-clear on inflation had been sounded," he said.
"We think there is a good chance that the Fed will still be tightening well into next summer," said Jason Rotenberg and Amit Srivastava, analysts at Bridgewater Associates, in a commentary.
A three-percentage point rise in short-term rates since June 2004 has not meaningfully slowed demand, while productivity growth is falling rapidly and inflation is rising, they noted. Plus, the Fed started out with rates at historic lows. "In order to slow down the economy, either long rates will have to rise or the Fed will need to tighten more than is currently priced in to force long rates higher. In either case, we expect [benchmark] bond yields to rise about 50 to 100 basis points before the economy slows enough to ease emerging cyclical inflationary pressures," they said.
Rachel Koning is a reporter for MarketWatch in Chicago.
Fed Day-www.urbansurvival.com
While a lot of media seem to salivating over upcoming coverage of Bush Supreme Court nominee Sam Alito, we just can't get too excited about it. First, while popular with conservatives and with liberals promising an "Armageddon" kind of showdown, we tend to look at such things in a more measured way: George Bush is the president, he gets to appoint who he wants to the High Court, and whether anyone likes it or not, that's how the system works.
Would Sam Alito be my pick? You can't ask that with a serious face, can you? But my point is that anyone who Bush picks is going to be liberal dart-thrower material because liberals don't have much of any record they can point to lately in the corporate duopoly that passes itself off as a Republic. For instance...
* The Bush/Cheney wars (Afghanistan and Iraq) are still being waged.
* The export of American jobs has continued unabated, ignoring NAFTA where inconvenient.
* The Mexican border still leaks like a sieve due to decisions as the top (not the rank and file who are being targeted by border runners and hamstrung from above.)
* Inflation (with food and energy) is running at double digit annualized rates lately
* Tax reform seems to make the rich richer adding to the concentration of wealth
* Young people today have less reason to hope because they're priced out of housing and reduced to low income jobs - even if they bought the "education myth"
* Investment in alternative energy is paltry
* Corporate agriculture is wiping out the family farms, although we are heartened by developments in Nebraska
* Projects like the CANAMEX highway promise to back up NAFTA with more and bigger foreign trucking operations
* Projects like the Wetlands Act promise to further limit the "public" from "public lands"
* Oh yeah, New Orleans and Rita recovery are an embarrassment.
Thus my conclusion: With little in the way of a record to stand on, I expect those politicos who are standing for election to shout, wave their arms, and speak as though kindred of the Mogambo Guru. But for all of it, there's little improvement, vast quantities of spending, and lots of HS&J (hype, shuck, and jive, for those too young to remember the 1960's).
Which gets us to the BIG news of the day - specifically the Fed meeting which I expect will raise rates at least a quarter of a point, but based on how the market has been run up in the past week, we might see a "November surprise" with a half point raise.
The reason I'm suspicious about the size of the hike has everything to do with how money is used to telegraph information around. For example, if you wanted the support of the big players in the market, you'd quietly give a nod here and there that the rate hike was going to be a "surprise" to the upside. That would likely cause the market to over react on the downside, but if you were a big player, you'd run things up in advance of the bad news (buy the rumor) and then sell the news when the decision comes out.
If that's a little too Machiavellian for you, try the simple approach: Expect a quarter, but anything goes on Fed Day.
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