Treasuries rally on view Fed rate hikes might slow
Wed Dec 14, 2005
By Ellen Freilich
NEW YORK, Dec 14 (Reuters) - Treasury debt prices rallied on Wednesday, adding to gains scored after the Federal Reserve hinted on Tuesday that its year-and-a-half long campaign of rate hikes might be waning.
"The market is taking some of the risk off the table that the Fed might be raising rates a lot further," said James Caron, derivatives strategist at Merrill Lynch.
On Tuesday, the Fed increased its benchmark federal funds rate by a quarter-percentage point to 4.25 percent, the highest level since April 2001.
But the market paid greater attention to what the Fed said in its policy statement.
In that statement, the Fed dropped a reference to "monetary policy accommodation," implying that monetary conditions were no longer actively stimulating economic growth.
"Clearly the Fed believes they're no longer accommodative and that they've moved into neutral territory," Caron said. "They're talking about some additional tightening, but that could be 25 basis points, or 50, or 75; we don't know. But the market is removing some of the tightening risk. That's why we are rallying."
Analysts said that by removing its reference to monetary policy accommodation, which implied that monetary conditions were still too stimulative given the economy's current growth profile, the Fed signaled the beginning of the end of a rate increase series that has pushed the fed funds rate up 3.25 percentage points in quarter-percentage-point increments.
In early dealings, benchmark 10-year notes were up 10/32, their yield easing to 4.48 percent from 4.53 percent on Tuesday. Two-year notes rose 1/32, their yields easing to 4.39 percent from 4.42 percent on Tuesday.
Five-year notes were up 5/32, their yields easing to 4.39 percent from 4.43 percent, while the 30-year bond was up 18/32, its yield easing to 4.69 percent from 4.73 percent on Tuesday.
Even so, analysts noted that the Fed had explicitly said that "some further measured policy firming" was likely.
A Reuters poll published late Tuesday showed that Wall Street is convinced that the Fed will raise interest rates at least one more time and that a majority of economists see more than one rate rise ahead in the New Year. Half of the 20 economists polled estimated that the federal funds rate would rise to 5.0 percent or higher by the end of the year.
The Fed next meets in January. Its March policy meeting will the first one for the new Fed Chairman, Ben Bernanke, and economists are divided over whether he will want to mark his new tenure with a rate rise. The Reuters poll found 15 of 20 analysts expect an increase in March, up from 12 analysts in the previous survey taken last month.
A government report released early in the trading session showed that the U.S. trade deficit widened unexpectedly in October to a record $68.9 billion despite a drop in the cost of imported oil. The news evoked little reaction in the bond market, however.
"The market didn't really react to the trade deficit," said Caron. "The deficit widened, but that's not really new news."