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US Treasuries find cold comfort in slow inflation
Thu Sep 16, 2004 09:42 AM ET
By Wayne Cole
NEW YORK, Sept 16 (Reuters) - Treasuries prices struggled to make even modest gains on Thursday as a key reading of U.S. inflation proved benign but did nothing to change expectations for an interest rate hike next week.
The consumer price index rose a modest 0.1 percent in August, exactly as forecast. The core measure excluding food and energy also rose 0.1 percent, half the gain analysts had looked for.
The annual rate of core inflation thus slowed to 1.7 percent from 1.8 percent, leaving it well within the Federal Reserve's presumed 1 to 2 percent comfort zone.
Still, Fed officials have already acknowledged the pullback in inflation and yet are sticking to their argument that interest rates are just too low for long-term price stability.
"We have the FOMC next week where a rate hike is a foregone conclusion and today's data didn't change that," said Kevin Logan senior economist at Dresdner Bank.
"If inflation were much stronger, it would have more of an influence on the bond market but since it's modest it's taken a back seat to concerns about growth in the real economy," he added.
Treasuries were thus left deadlocked, with the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) edging up 3/32 in price, lowering yields to 4.15 percent from 4.16 percent on Wednesday.
Dealers noted liquidity was lacking since many market participants were off for the Jewish new year holiday.
For the moment, traders were just playing the range. Having failed several times to break 4.13 percent on 10-year yields, speculators were aiming to test chart barriers at 4.18 percent and 4.21 percent, but so far having little luck.
The benign outlook for inflation did tend to benefit longer-term debt at the expense of shorter-dated issues and led to a slight flattening in the yeld curve.
Yields on two-year notes (US2YT=RR: Quote, Profile, Research) hovered around 2.49 percent, while the gap between them and 10-year yields narrowed to 167 basis points -- near its lowest levels since September 2001.
Yields on the five-year note (US5YT=RR: Quote, Profile, Research) eased to 3.37 percent from 3.38 percent, while the 30-year bond (US30YT=RR: Quote, Profile, Research) added 8/32 in price, lowering its yield to 4.94 percent from 4.96 percent.
Also out on Thursday were initial jobless claims which rose 16,000 to 333,000 last week. That was a little less than forecast but the data have been so distorted by weather and seasonal factors recently that they have lost much of their predictive power for the labor market.
Still to come on Thursday is the Philadelphia Fed survey of regional manufacturing. Forecasts had been for a dip to 24.5 in September from 28.5 in August, but some analysts see a chance of a stronger result after the New York Fed's survey, released on Wednesday, showed a sharp revival in activity.
Fed Board Governor Edward Gramlich speaks on "Oil Shocks and Monetary Policy" before a luncheon of the Fed Bank of Kansas City around 1 p.m. (1700 GMT).
However, with the Fed meeting so near, analysts doubted he would do anything to change market expectations on policy.
Thu Sep 16, 2004 09:42 AM ET
By Wayne Cole
NEW YORK, Sept 16 (Reuters) - Treasuries prices struggled to make even modest gains on Thursday as a key reading of U.S. inflation proved benign but did nothing to change expectations for an interest rate hike next week.
The consumer price index rose a modest 0.1 percent in August, exactly as forecast. The core measure excluding food and energy also rose 0.1 percent, half the gain analysts had looked for.
The annual rate of core inflation thus slowed to 1.7 percent from 1.8 percent, leaving it well within the Federal Reserve's presumed 1 to 2 percent comfort zone.
Still, Fed officials have already acknowledged the pullback in inflation and yet are sticking to their argument that interest rates are just too low for long-term price stability.
"We have the FOMC next week where a rate hike is a foregone conclusion and today's data didn't change that," said Kevin Logan senior economist at Dresdner Bank.
"If inflation were much stronger, it would have more of an influence on the bond market but since it's modest it's taken a back seat to concerns about growth in the real economy," he added.
Treasuries were thus left deadlocked, with the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) edging up 3/32 in price, lowering yields to 4.15 percent from 4.16 percent on Wednesday.
Dealers noted liquidity was lacking since many market participants were off for the Jewish new year holiday.
For the moment, traders were just playing the range. Having failed several times to break 4.13 percent on 10-year yields, speculators were aiming to test chart barriers at 4.18 percent and 4.21 percent, but so far having little luck.
The benign outlook for inflation did tend to benefit longer-term debt at the expense of shorter-dated issues and led to a slight flattening in the yeld curve.
Yields on two-year notes (US2YT=RR: Quote, Profile, Research) hovered around 2.49 percent, while the gap between them and 10-year yields narrowed to 167 basis points -- near its lowest levels since September 2001.
Yields on the five-year note (US5YT=RR: Quote, Profile, Research) eased to 3.37 percent from 3.38 percent, while the 30-year bond (US30YT=RR: Quote, Profile, Research) added 8/32 in price, lowering its yield to 4.94 percent from 4.96 percent.
Also out on Thursday were initial jobless claims which rose 16,000 to 333,000 last week. That was a little less than forecast but the data have been so distorted by weather and seasonal factors recently that they have lost much of their predictive power for the labor market.
Still to come on Thursday is the Philadelphia Fed survey of regional manufacturing. Forecasts had been for a dip to 24.5 in September from 28.5 in August, but some analysts see a chance of a stronger result after the New York Fed's survey, released on Wednesday, showed a sharp revival in activity.
Fed Board Governor Edward Gramlich speaks on "Oil Shocks and Monetary Policy" before a luncheon of the Fed Bank of Kansas City around 1 p.m. (1700 GMT).
However, with the Fed meeting so near, analysts doubted he would do anything to change market expectations on policy.
