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Bonds rest, euro surges
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June 18, 1999: 9:42 a.m. ET
European central banks buy continental currency, weaken yen
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NEW YORK (CNNfn) - U.S. Treasury bonds eased Friday morning, digesting the previous day's gains, while European central bank intervention pushed the euro back into the currency market spotlight.
Shortly before 9 a.m. ET, the benchmark 30-year Treasury bond slipped 3/32 of a point in price to 90-4/32. The yield, which moves in the opposite direction, edged up to 5.96 percent.
The dollar climbed against the yen but retreated sharply from the euro after European central banks followed the Bank of Japan's lead by selling yen and buying the Continental currency. In early U.S. trading, the dollar rose to 120.20 yen, but slipped to $1.0393 on the euro.
Europe intervenes
The European Central Bank confirmed that it had bought large quantities of euros at inflated rates, 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 thought that European authorities may be shifting to a more active role in the defense of their currency, pushing the euro back up to nearly 125 yen in early U.S. trading.
The euro has suffered in recent months from a perceived lack of support from European officials, especially those in the communal European Central Bank (ECB). ECB leaders have caused their fledgling currency to reach lifetime lows against both the dollar and yen by pursuing a policy of non-intervention and apparent disdain for exchange matters.
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.
The European rumors 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 themselves 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, traders expected the day to be unexceptional. No economic data was scheduled, 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. 
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