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Bonds flee Greenspan
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February 23, 1999: 3:31 p.m. ET
Dollar holds ground but Treasury prices dive on hints of interest rates, inflation
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NEW YORK (CNNfn) - Bond sellers returned to the U.S. debt market with a vengeance Tuesday after comments from Federal Reserve Chairman Alan Greenspan unleashed abiding fears of inflation and possible rate hikes ahead.
By 3:00 p.m. ET, the price of the benchmark 30-year Treasury bond had fallen 28/32 of a point to 97-17/32, nearly erasing all gains made since the sell-off on Feb. 12 and driving the yield back up to 5.41 percent.
Selling was seen at all points in the maturity curve, with two-year notes down 5/32 at 99-3/32 to yield 4.98 percent.
Traders said investors had used Greenspan's semiannual Humphrey-Hawkins report on U.S. monetary policy as an excuse to sell.
"The market didn't like his lines about inflation," said Joe Abate, economist at Lehman Brothers. "Overall, the speech was extremely well balanced . . . The market is just focusing on one or two lines out of the entire speech."
In particular, the bond market reacted negatively to Greenspan's implication that inflation could increase unless productivity continues to climb.
Productivity, a measure of the relative efficiency of U.S. workers, is considered a key warning signal watched by the Federal Reserve to gauge the impact of wage inflation in the U.S. economy.
Furthermore, Greenspan noted that several key components of the current climate of low inflation are "unlikely to be repeated."
This, in turn, may necessitate interest rate changes moving "quickly in either direction" to keep the economy free of inflationary pressures -- a comment that bond traders took as a hint that the Federal Reserve may be adopting a tightening stance toward interest rates.
"One statement out of Greenspan that really stirred up the market was that he overstimulated the market with the three (rate) easings" of 1998, said Jim Nealis, head trader at PaineWebber.
However, Nealis added that the remainder of Greenspan's comments were "much more balanced than what the headlines read" and that the worst of the bond sell-off seems to be done.
Greenspan likes the dollar?
By contrast, the Fed chief praised the dollar's performance, saying that "it's been behaving rather well," but traders were more concerned by his warning that "the exchange value of the dollar may well decline . . . should the sustainability of the buildup of our foreign indebtedness come into question."
This unexpectedly sour note dented the dollar's rise against the yen, although the U.S. currency remained near its all-time highs against the euro.
By 3:00 p.m. ET, the dollar had slipped to 120.90 yen, slightly below its previous close of 121.18 and a full yen under the day's trading high of 121.90.
The euro remained near the $1.094 cellar of its seven-week trading life, sinking to $1.1007 from its previous close of $1.1024.
The U.S. trade gap is already at a record level of $168.6 billion for 1998 and is expected to grow in 1999, underlining Greenspan's ominous tone regarding the sustainability of "foreign indebtedness" and dollar valuations. 
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