NEW YORK (CNNfn) - The bond market got a much-needed rally Monday after benign personal income figures and the hope of lighter supply ahead reassured investors nervous about an upcoming Federal Reserve interest rate meeting.
Shortly before 3 p.m. ET, the bellwether 30-year Treasury bond had soared 20/32 of a point in price to 88-13/32. The yield, which moves in the opposite direction from the price, slipped to 6.10 percent.
Traders said the market was transfixed by the Fed's Open Market Committee (FOMC) meeting Tuesday and Wednesday. The FOMC, which arbitrates U.S. interest rate policy, is widely expected to raise the key fed funds rate by 25 basis points, or a quarter percentage point, to 5 percent.
Despite the near certainty of the rate hike, market participants will comb through the FOMC's statement for clues to future rate actions. Speculation that the Fed may take back all of late 1998's three rate cuts has driven buyers from the bond market, sending yields to 19-month highs.
Bond yields generally rise in a climate of rising short-term interest rates, as higher lending rates make bonds less competitive compared with cash and so depress bond prices.
Data, surplus feed rally
Meanwhile, the bond market got a slight lift from a morning release of spending data for May, which showed average personal income edging up only 0.4 percent in the month. Economists had prepared investors to expect a slightly more robust increase of 0.5 percent, in line with the April figure.
Personal spending was on target, climbing 0.6 percent, while the savings rate shrank to minus 1.2 percent, the lowest rate on record.
The personal income statistic is a direct indicator of wage inflation at work in the U.S. economy. Inflation-wary investors are deeply sensitive to fluctuations in the data because Fed Chairman Alan Greenspan has repeatedly pointed to wage inflation as the likeliest avenue through which broader inflationary pressures will re-enter the economy.
The FOMC, in turn, combats signs of reborn inflation by raising interest rates, thus slowing economic growth and robbing inflation of the fuel it needs to grow. The personal income figures are the last major economic report the panel will consider in making its decision this month.
News that President Clinton expects the U.S. federal budget surplus to climb to $99 billion in 1999, from earlier estimates of $79 billion, also helped push bond prices higher. A higher-than-expected budget surplus means that the Fed likely will extend its recent trend of lowering bond issuance, draining the bond market of fresh supply and so driving prices higher to match unabated demand.
Dollar in a rut
The dollar offered bond traders little impulse in either direction, as the greenback remained trapped in a narrow range against both the euro and the yen.
Against the yen, the dollar crept down to 121.20 yen, although speculators remained wary of possible Bank of Japan (BOJ) intervention. "Mister Yen," Japanese Vice-Minister of Finance Eisuke Sakakibara, and his heir-apparent Haruhiko Kuroda, repeated Monday the Japanese currency establishment's daily warnings that the BOJ will not hesitate to sell yen for dollars or euros.
The BOJ has intervened to keep the yen from appreciating too much four times this month, spending billions of dollars to support other global currencies. A weaker yen is in Japan's best interests because it encourages that nation's key export sector, which has pulled Japan out of economic recession.
The euro, meanwhile, slipped to $1.0352, drifting as traders took some profits from last week's euro recovery but mostly waited for the Fed.
Currency traders said the morning's effective devaluation of Colombia's peso had spurred only minimal strength in dollar trading, but was instead encouraging the market's overall sense of anticipation and caution. Colombia expanded the bands in which it allows the peso to trade, essentially allowing speculators to push the currency down as much as 11 percent.