US Treasuries dip as market looks to Fed minutes
Tue Oct 11, 2005 09:12 AM ET
NEW YORK, Oct 11 (Reuters) - U.S. Treasuries were slightly lower early Tuesday, as traders anticipated the release of hawkish minutes from the Federal Reserve's most recent policy meeting.
The market is particularly interested in Fed Gov. Mark Olson's vote at the Sept. 20 meeting to keep rates steady at a time when the Fed seems so clearly focused on fighting inflationary pressures with further interest rate increases.
While the Fed raised official short-term interest rates by a quarter-percentage-point to 3.75 percent at that meeting, Olson's dissenting vote was the first for the Federal Open Market Committee since mid-2003.
But whatever Olson's motivation, few in the market doubt the Fed's resolve to raise interest rates as underlying economic strength and energy-related inflation related to Hurricane Katrina rear their heads. Virtually everyone in the market says yields are marching higher.
The Fed minutes are due to be released at 2 p.m. (1800 GMT).
The slightly weaker bias for shorter dated Treasuries prices came amid quiet trade that followed a market holiday on Monday and reflected a similar picture in euro zone and Japanese government bonds.
"In short, we think yields will continue to rise over the next few months as a relatively strong post-Katrina picture emerges," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. Shepherdson predicted yields on the 10-year note will push above 5 percent by the spring of 2006.
On Tuesday morning, 10-year notes (US10YT=RR: Quote, Profile, Research) were 1/32 lower in price to yield 4.36 percent, while two-year notes (US2YT=RR: Quote, Profile, Research) fell 2/32 for a yield of 4.22 percent, compared with 4.18 percent on Friday.
Five-year notes (US5YT=RR: Quote, Profile, Research) fell 3/32 in price for a yield of 4.25 percent from 4.23 percent on Friday. The 30-year bond (US30YT=RR: Quote, Profile, Research) fell 2/32 to yield 4.57 percent.
Though Olson's dissent will attract attention, dealers are mindful of the fact that most recent Fed rhetoric has leaned toward more hikes, and this could well trump any of Olson's arguments for a pause in monetary tightening.
"The minutes are expected to be on the hawkish side given recent Fedspeak, which may add further pressure in the short-end of the curve," RBS said in a note to clients.
But Olson's reluctance to raise rates could have more significance further out, especially considering a mild inversion of the eurodollar interest rate futures curve for maturities around the end of next year (0#ED:: Quote, Profile, Research) .
"It just signals the market doesn't see rates going up more than 4.25/4.50 percent, and the market expects the cycle to peak in June 2006."
Early on Tuesday, two reports showed U.S. chain store sales rising in early October, as compared to weekly periods in September, as consumers began to shop for fall apparel. On the other hand, some of those gains were built on a base that had been hurt by fallout related to Hurricane Katrina.
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