NEW YORK (CNNfn) - Alan Greenspan delivered a breath of icy air to the bond market Thursday, leaving Treasury traders stunned while yields spiraled toward 9-month highs on a bitter wind of inflation ahead.
Shortly before 3 p.m. ET, the benchmark 30-year Treasury bond had tumbled 1-6/32 points in price to 92-9/32, pushing the yield up to 5.79 percent.
The market had opened in a bad mood ahead of the Federal Reserve chairman's testimony, but the selling deepened after traders digested Greenspan's newly hawkish tone.
In his remarks to the Chicago Federal Reserve Bank, Greenspan noted that low oil prices and growing efficiency in the U.S. work force had allowed the U.S. economy to expand without generating significant inflation, but neither condition is likely to last forever.
Instead, Greenspan struck a mortal blow to investors' utopian dreams of a "new era" of inflationless economic prosperity, noting wryly that he had "experienced too many alleged new eras . . . that have come and gone."
Both stock and bond markets took Greenspan's comments as a veiled omen of revived inflation, which in turn likely will spur the Federal Reserve to take an increasingly positive bias toward tighter interest rates.
The bond market in particular took the speech as "very bearish," said William Kirby, co-head of government bond trading at Prudential Securities. He added ruefully that there were "no buyers and many sellers" in the market after Greenspan's comments, with some significant liquidation activity.
Greenspan and the Federal Open Market Committee (FOMC) he chairs will next meet to set U.S. rate policy May 18.
Bond bulls looking to currency markets for strategic direction found no help, with the dollar continuing its three-day retreat from a seemingly invincible euro, while the yen overcame its early weakness.
The euro climbed Thursday to $1.081, almost effortlessly hurdling the $1.08 level it abandoned three weeks ago as hope for peace in the Balkans built on support offered earlier in the week by European banking chief Wim Duisenberg.
The war-weary European currency kept up its winning pace after a Bonn meeting of the Group of Eight (G8) industrialized nations said it had "agreed to a common strategy" for handling civil conflict in Yugoslavia.
War between NATO and Yugoslav forces, now well into its second month, has helped push the euro into a deep retreat, as investors fleeing the uncertainties on united Europe's borders parked their cash in the relative safety of dollars.
Meanwhile, dollar bulls took a page from the bond market's book and fled Greenspan and retreating U.S. stocks. The dollar has firmed recently in response to a blockbuster rally in U.S. stocks, but Wall Street's fearful response to the Fed chief's testimony left the greenback without support.
The dollar has made especially strong gains against the yen in recent sessions as global traders funnel money into greenbacks in order to buy onto Wall Street. However, a competing surge on the Tokyo stock market could derail the dollar's gains as U.S. stocks faltered.
In late U.S. trading, the dollar eased slightly against the Japanese currency to 120.49 yen.
-- by staff writer Robert Scott Martin