Bond weary as week ends
|
|
June 18, 1999: 3:40 p.m. ET
ECB intervention in currency markets leaves Treasury traders unimpressed
By Staff Writer Robert Scott Martin
|
NEW YORK (CNNfn) - U.S. Treasury bonds eased Friday, digesting the previous day's gains after an exhausting week of mingled dread and relief. Meanwhile, European central bank intervention in euro markets gave currency traders plenty to think about.
Shortly before 3 p.m. ET, the benchmark 30-year Treasury bond slipped 7/32 of a point in price to 89-29/32. The yield, which moves in the opposite direction, edged up to 5.98 percent.
The dollar climbed against the yen but retreated sharply from the euro after the European Central Bank (ECB) followed the Bank of Japan's lead by selling yen and buying the Continental currency. In late U.S. trading, the dollar rose to 120.48 yen, but slipped to $1.0389 on the euro.
Europe intervenes
The ECB confirmed market reports that it bought large quantities of euros at inflated rates Friday, selling yen in exchange. The yen's recent strength has put the euro on the defensive, forcing the beleaguered European currency to a lifetime low of 122.60 yen.
Euro bulls rejoiced at the sign that European authorities may be shifting to a more active role in the defense of their currency, pushing the euro up nearly 2-1/2 yen from its nadir.
The euro has suffered in recent months from a perceived lack of support from European officials, especially those in the communal ECB. Recent comments from ECB members have indicated an official policy of non-intervention and apparent disdain for exchange matters, leaving their fledgling currency to drift from low to low over its short five-month history.
The ECB said Friday it had acted on behalf of the Bank of Japan, which has decried the yen's unexpected surge in value and bought billions of dollars in the past week in order to keep their currency under control.
According to at least one investment strategist, the Japanese central bank's urgency in supporting the euro against the yen was due to shifting patterns of institutional Japanese investments.
Chris Turner, global strategist at IDEAGlobal.com, said Japanese interests have taken an increasingly large position in European bond markets, but the risk that that unhedged position could unravel as the yen climbed forced quick and decisive action.
"With euro/yen falling very sharply and suffering very large capital losses, what Japan has decided to do is intervene aggressively on euro/yen to prevent these capital losses," he said, adding that a failure to intervene would have forced "a fire sale of capital assets, which obviously wouldn't help Europe or Japan."
The ECB move also supported the dollar by reminding speculators of the likelihood of renewed direct BOJ action should the yen climb too high.
Bonds exhausted
Back in the Treasury market, traders said investors had worn themselves out Thursday, when the long bond soared more than a full point in price after Federal Reserve Chairman Alan Greenspan soothed the market's worst interest rate fears.
In his prepared congressional testimony, Greenspan hinted that the Fed's Open Market Committee (FOMC) will confirm investors' expectations by raising U.S. interest rates at the end of June. However, his comments provided little to indicate that the FOMC will raise rates to a dramatic extent this year, a scenario that some traders had feared.
On Friday, economists and investors alike had already discounted the likelihood of a June rate hike of about 25 basis points, or a quarter of a percentage point, and were speculating on whether the Fed would stop there.
"(Greenspan) cut rates three times last year, but he said that the conditions that required those cuts are no longer with us," said David Jones, chief economist at Aubrey G. Lanston. "So the outside limit to what he is going to do is three hikes. My guess is that you will only end up with a couple of them, a quarter-point at the end of this month, one in August, and maybe one in October."
Other than lingering Greenspan relief, the day was unexceptional, with volume only 60 percent of normal for a second-quarter Friday.
There were no economic releases, leaving investors the freedom to contemplate the longer-term outlook for bonds. Some looked overseas, where the crisis conditions that first spurred 1998's rate cuts seemed to be easing.
"The biggest threat to the bond market looking ahead 6-9 months is what becomes of overseas economies," said John Lonski, bond market analyst at Moody's Investors Service. "Let us not forget that the Federal Reserve cut interest rates three times in 1998 because of the unexpected severity of overseas economic slumps."
"If it turns out that a number of overseas economies mimic the very strong economy now being reported by Korea, we could be looking at a surprisingly steep upturn in Treasury bond yields later this year," Lonski added.
|
|
|
|
|
|