Treasuries rally as Fed concerns fade
Thu Sep 21, 2006
By Burton Frierson
NEW YORK, Sept 21 (Reuters) - Benchmark U.S. Treasury debt prices rose to their highest in nearly six months on Thursday as investors reverted to their recent view that interest rates would remain steady this year before easing in 2007.
After pausing on Wednesday to weigh the Federal Reserve's latest policy statement, buyers emerged on Thursday to push 10-year yields down as far as 4.701 percent, their lowest since late March <US10YT>.
The Federal Reserve's decision to leave its overnight federal funds rate unchanged for the second straight meeting at 5.25 percent came as little surprise, though some bond investors had bet it would soften its tone on inflation.
However, dealers said they still expected concerns that a weakening housing market could spill over into the rest of the economy would lead the U.S. central bank to ease monetary policy next year, which should underpin bond prices.
The Fed raised rates 17 times in the two years to June.
"Until you see the housing numbers improve the market is going to continue to believe that the next move is a cut, regardless of whether that's not what the Fed is telling you, that's what the market believes," said Rick Klingman, head trader on the U.S. Treasury desk with ABN AMRO in New York.
Benchmark 10-year notes <US10YT> traded 5/32 higher in price on the day to yield 4.713 percent, compared with 4.74 percent late on Wednesday. Bond yields and prices move inversely.
On Wednesday the 10-year yield fell to 4.713 percent, then its lowest since late March, before retracing that move in the wake of the Fed statement.
Two-year notes were underperforming, trading flat on the day and yielding 4.809 percent <US2YT> while five-year notes were up 2/32 on the day, yielding 4.682 percent <US5YT>.
TWO-YEARS UNDERPERFORM
Dealers said they expected two-year notes, the most sensitive to monetary policy moves, to underperform longer-dated paper in the coming weeks since yields were already well below the Fed's current 5.25 percent federal funds rate.
"Any bullish sentiment will probably be reflected in the intermediates -- the five-year, 10-year and in the long end," said Bulent Baygun, head of fixed income strategy at Barclays Capital in New York.
"I would expect that same kind of dynamic to prevail for the next month or two."
Dealers were also awaiting the Philadelphia Fed's survey of factory activity in the U.S. Mid-Atlantic region at noon.
Economists polled by Reuters forecast a median reading of 14.8 for September, down from 18.5 in August.
Treasuries prices earlier showed little reaction after jobs data showed first-time claims for state unemployment insurance benefits rose modestly in the most recent week