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Bonds defy GDP uptick
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June 25, 1999: 9:19 a.m. ET
Bargain hunters feast on Treasury debt despite sign of reborn inflation
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NEW YORK (CNNfn) - Bond prices edged higher Friday after a few bargain-hungry investors braved the morning's bond-unfriendly economic data to pick up some temptingly oversold Treasury debt.
Shortly before 9 a.m. ET, the benchmark 30-year bond rose 15/32 of a point in price to 88-1/8. The yield, which travels in the opposite direction from the price, eased to 6.12 percent.
Activity remained thin, exaggerating the apparent impact of the gains. Moreover, traders warned the upturn was likely to prove unsteady in the face of stronger-than-expected gross domestic product (GDP) statistics, especially in the shadow of next week's interest-rate setting Federal Reserve meeting.
According to the second and final revision of the first-quarter GDP, the U.S. economy grew at a rate of 4.3 percent in early 1999, edging past both the previous estimate of 4.1 percent and the bond market's forecast of 4.2 percent.
A rising implicit price deflator, a broad gauge of inflationary pressures, had a more direct impact on the inflation-wary bond market. The deflator rose 1.5 percent in the quarter, again outpacing the previous estimate and investors' expectations of 1.4 percent.
One eye on inflation
Economic growth naturally generates inflation, one of the natural enemies of bonds and other fixed-income securities. High inflation not only depresses the real value of bonds' pre-set returns, but it increases the likelihood that the Federal Reserve's Open Market Committee (FOMC) will keep its bias toward higher interest rates in future meetings.
Most investors now believe the FOMC will raise rates at least once this year, tightening the funds rate by 25 basis points, or a quarter percentage point, to 5 percent when it meets Tuesday and Wednesday.
"We're in this volatile trading range right now until we see what the Fed's going to do," said Dan Veru, stock analyst at money manager Awad & Associates. "A quarter-point rate increase is clearly built in (bond yields). You really want to see what further direction the Fed's going to give from that point -- whether this is the first of several rate hikes, which I think would be a negative for the market."
The threat of several rate hikes -- or a few more- intensive increases -- has driven the bond market into a full-fledged retreat this week, pushing the benchmark yield to a 19-month high of 6.19 percent Thursday as prices erode.
Before the FOMC meeting, investors had one last chance to gauge the state of the U.S. economy. Traders said the bond market was grasping at the upcoming release of May existing home sales data at 10 a.m. ET for a final glimpse into what the Fed may do next week. Economists expect the number of home sales to slip to an annual rate of 5.23 million from 5.24 million in April, but an unexpected change could knock the unsteady bond back off balance.
Dollar flees bonds, stocks
The dollar, meanwhile, was back on the defensive, hit hard by Thursday's simultaneous declines in the U.S. bond and stock markets as overseas flows of cash into the dollar-denominated securities ebbed.
In early U.S. trading, the euro had climbed to $1.0451 after hitting two-week highs overnight, while the dollar slipped to 121.55 yen from its previous close of 121.91.
Although traders noted that the dollar's gloom had spread from Wall Street and the Treasury market, technical factors also were to blame as many speculators found themselves caught long on dollars ahead of next week's Fed meeting and the end of the financial quarter.
The specter of Japanese currency intervention kept dollar/yen relatively subdued, however. The Bank of Japan (BOJ) has aggressively sold yen on four separate occasions this month in an attempt to keep that currency from appreciating too quickly. A strong yen would endanger Japan's still-tentative economic recovery by hurting exports, leaving the nation's key manufacturing sector heading back into decline.
On Friday, "Mister Yen," Japanese Vice-Finance Minister Eisuke Sakakibara, reminded yen bulls yet again that the BOJ is watching and ready to push the yen down should it gain too much on the dollar or other currencies. 
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