US Treasuries enjoy relief rally on GDP, inflation
Fri Jan 28, 2005 09:27 AM ET
By Wayne Cole
NEW YORK, Jan 28 (Reuters) - Treasuries prices climbed on Friday after data showed the U.S. economy grew less quickly than expected last quarter, tempering concerns the Federal Reserve might have to raise interest rates at a faster pace.
Gross domestic product grew at an annualized 3.1 pace in the fourth quarter, under forecasts of 3.5 percent. The trade deficit took a bigger chunk out of growth than many expected, though this could be revised depending on December trade data.
Inflation indicators were mixed. The core personal consumption deflator rose to an annual 1.6 percent from 0.9 percent, but this is still within the Fed's presumed comfort range.
The employment cost index for last quarter showed a rise of only 0.7 percent, against expectations of 0.9 percent. Wages and salaries were up a measly 0.4 percent suggesting little price pressure from labor.
"The PCE excluding food and energy is not yet at a rate that would make the Fed worry," said Elisabeth Denison, economist at Dresdner Kleinwort Wasserstein.
This came as a relief to bond investors given recent Fed rhetoric about heading off inflation and led Eurodollar futures (0#ED:: Quote, Profile, Research) to slightly lower expectations for interest rate hikes in the year ahead.
Likewise, the interest-rate sensitive two-year Treasury note (US2YT=RR: Quote, Profile, Research) rose 3/32 in price, lowering its yield to 3.25 percent. On Thursday, it had closed at a 2-1/2 year high of 3.30 percent.
The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) rose 15/32 in price, taking its yield to 4.16 percent from 4.22 percent. Yields on five-year notes (US5YT=RR: Quote, Profile, Research) declined to 3.71 percent from 3.75 percent.
The 30-year bond (US30YT=RR: Quote, Profile, Research) leaped almost a full point, compressing yields to 4.63 percent from 4.68 percent, as investors seemed to take cheer from the inflation outlook.
"There was a little inflation heat in the fourth quarter, but not enough to affect Fed policy," concluded Chris Low, chief economist at FTN Financial. "Gradual removal of accommodation should continue."
The market fully expects the Fed to hike rates a quarter percentage point to 2.5 percent when it meets next week, and has priced in matching rises at the two following meetings.
Still, traders doubted the bond market could add much more to its initial gains given the raft of data and events coming in the next few days.
Elections in Iraq at the weekend could lead to more violence and perhaps safe-haven flows to bonds. Then again, a successful election could be seen as lessening global risks and thus hurt Treasuries.
The Fed meets on Tuesday and Wednesday, and any hint of inflation concerns in the policy statement could alarm fixed-income markets. And the end of the week, sees the January payrolls report out.