Bonds rally ahead of Fed meeting Wednesday, September 20, 2006
NEW YORK- Treasury bond prices mounted a strong rally Tuesday ahead of a key Federal Reserve meeting, as investors were cheered on by economic data that solidified the case for the Fed to hold interest rates steady.
At 5 p.m. EDT, the 10-year Treasury note was up 19/32 from late Monday. Its yield, which moves in the opposite direction, fell to 4.73 percent from 4.81 percent.
The 30-year bond was up 1 1/32. Its yield fell to 4.85 percent from 4.93 percent.
The 2-year note was up 4/32, yielding 4.80 percent, down from 4.88 percent.
Yields on 3-month Treasury bills were 4.95 percent as the discount rate fell to 4.82 percent from 4.83 percent.
Prices rose most sharply in the wake of government data that showed wholesale prices last month rose by a smaller-than-expected amount. Also aiding the Treasury bond market were housing data showing a continued slowing in the sector.
"Today's numbers won't be missed by the Fed," said Kevin Giddis, managing director in fixed income for investment fund Morgan Keegan & Co. in Memphis. "This type of data should make it easier for them on one hand, and possibly disturb them on another," he said. While inflation numbers are moving the way the central bankers would like them to, the housing sector may be slowing down more than the Fed would like to see, Giddis said.
The Labor Department said its producer price index rose by 0.1 percent overall for August, less than the expected rise of 0.2 percent. The core PPI, which strips out food and energy, fell by 0.4 percent even though it was expected to rise by 0.2 percent.
The PPI data follow on the heels of Friday's consumer price index, which was also tame. Collectively, the data suggest that the inflation threat faced by the economy is fading, which helps bolster the case for the Fed holding monetary policy steady.
That is a significant development, coming just ahead of Wednesday's gathering of the interest-rate setting Federal Open Market Committee. Wall Street universally expects the Fed to keep the federal-funds target rate at 5.25 percent for the second straight meeting after two years of raising rates. Central bankers generally believe a cooling economy will moderate inflation pressures most officials still call too high.
Housing data from the Commerce Department helped reinforce the market's view on the economy and rate policy. August housing starts marked their fifth straight decline in six months and slipped by 6 percent to a 1.665 million unit annual rate, the lowest level in three years. Housing numbers have broadly been cooling, and that is also aiding the Fed's case.
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