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Bond yield at 6-week high
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October 1, 1999: 3:36 p.m. ET
Treasurys tank as inflation fears escalate; dollar falls vs. yen, euro
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NEW YORK (CNNfn) - Treasury bond prices plunged more than a point and a half Friday, sending yields to their highest levels in six weeks, after a series of reports showing surprising economic strength ignited fears of rising inflation.
Just before 3 p.m. ET, the price of the benchmark 30-year Treasury bond tanked 1-20/32 to 99-15/32. Its yield, which moves inversely to the price, soared to 6.16 percent from 6.04 percent Thursday, marking its highest yield since Aug. 13.
The day's sharpest sell-off followed a report showing manufacturing surged last month. The National Association of Purchasing Management index rose to 57.8 in September, well above the 54.3 reading economists expected, from 54.2 in August.
More significantly, the index's price component, a measure of inflationary pressures, rose to 67.6 from 59.8 in August.
For analysts, the NAPM report, coupled with earlier data showing Americans continued to spend at a brisk pace last month, gave the Federal Reserve more ammunition to raise interest rates in a bid to pre-empt inflation.
"There's no indication that the two rate hikes of 1999 have succeeded in slowing the economy," John Lonski, bond strategist at Moody's Investors Service, said referring to the Fed's last two moves. Domestic "spending continues to rise just as foreign economies are gaining momentum."
Lonski foresees the Fed leaving rates unchanged when it meets Tuesday while shifting its inclination, or bias, toward a future tightening, which he predicts will happen in November.
Friday's data aside, the broader inflation picture remains mixed, leading many like Lonski to believe the Fed will wait for more evidence of economic strength before acting.
While labor markets remain tight and commodity prices are rising, employment data, consumer prices and producer prices all have come in weaker than expected recently.
Still, many see a looming end to the so-called "Goldilocks" economy of buoyant growth without appreciable inflation.
"The U.S. economy continues to perform well but the so-called 'new era' economy -- wherein strong growth and low inflation can coincide -- is coming under increasing pressure," said Tony Crescenzi, head bond strategist at Miller Tabak & Co.
When it comes to those pressures, Crescenzi cited recovery of overseas economies, climbing commodity prices, rising health care costs and the falling dollar.
Dollar's slide continues
In the currency markets, the dollar continued its slide Friday against the major currencies.
The greenback dropped against the yen for the second straight session over optimism that a key report on Japanese business sentiment will show improvement.
Just before 3 p.m. ET, the U.S. currency slipped to 105.16 yen from 106.37 Thursday, a 1.14 percent drop in the dollar's value.
Helping the yen, economists expect the Bank of Japan's "tankan" survey out Monday to show a further improvement in corporate sentiment in the past three months.
But the yen's strength is a mixed blessing for Japan because a strong yen makes it tough for the export-dependent nation to sell its goods aboard. This, in turn, could stall its recovery from recession.
A buoyant yen has also been drawing investor assets into Japan and away from U.S. equity markets, which suffered another losing session Friday.
"If the dollar erodes, it means the U.S. market is less attractive to foreigners," said John Murphy of MurphyMorris.com. "Japan has been the principal beneficiary of that. The yen has become the strongest currency of the world in the past six months and part of that is money coming out of the U.S., moving into the Japanese market."
In another sign of economic recovery, Japan's jobless rate fell to 4.7 percent in August from the previous month's record high 4.9 percent, the government said. Analysts expected the rate to hold steady.
The dollar, meanwhile, continued falling vs. the euro Friday on signs of investor optimism over economic recovery in Europe.
This rise comes amid growing speculation that the European Central Bank will raise interest rates next week to cool inflation.
Just before 3 p.m. ET, it cost $1.0730 to buy one euro from $1.0684 Thursday, a 0.43 percent fall in the dollar's value.
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