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Bond yield hits year high
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December 16, 1999: 3:47 p.m. ET
Treasurys tank as latest data suggests inflation; dollar falls versus yen, euro
By Staff Writer Jake Ulick
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NEW YORK (CNNfn) - Treasury bonds fell for the fourth straight session Thursday, sending yields to the highest levels of the year, after the latest batch of strong economic data ignited fears of another interest rate hike ahead.
Bonds tanked after separate government reports showed the labor market continues to tighten and the American consumer continues to spend, giving the Fed one more reason to tighten credit to preempt inflation.
Just before 3:15 p.m. ET, the price of the benchmark 30-year Treasury bond fell 27/32 to 96-15/32. Its yield, which moves inversely to the price, rose to a 1999 high of 6.39 percent from 6.32 percent Wednesday.
"The credit market is bracing itself for some (interest rate) tightening,” said John Lonski, senior economist at Moody’s Investors Service.
The latest bracing came after the government said the nation’s trade deficit widened to a record $25.9 billion in October from $24.4 billion the previous month. With demand for imports far outpacing exports, the news suggests the American consumer continues to spend with abandon.
"We are just supplying the world with demand,” said Charles Lieberman, chief economist at First Institutional Securities. "It tells you demand is very strong.”
Although the higher-than-expected deficit could lead to a downward revision in the nation’s gross domestic product -- because the higher deficit suggests a slowdown in export activity -- analysts say such a revision would be slight.
"This still leaves (GDP) forecasts clustered around 4.5 to 5 percent,” said Tony Crescenzi, bond strategist at Miller tabak & Co. "Thus, the basic message of too-strong growth is intact there.”
First Institutional Securities’ Lieberman, however, reserved his biggest shock for news that the number of Americans filling for first-time unemployment benefits plunged last week to 266,000, the lowest figure in 26 years; and in 1977 the labor market was much smaller.
"The claims number is even more astonishing than the trade number,” he said, because it suggests tight labor markets continue to tighten.
The nation’s unemployment rate of 4.0 percent, nearly a 30-year low, has given Fed officials reason to fret that employers eventually will have to raise wages, triggering inflation.
Bond investors have plenty of other inflation signs to fret about. Inflation erodes a bond’s value.
Stocks rose again Thursday, pushing the Nasdaq into record territory, in a phenomenon that economists say creates the kind of paper wealth that leads to increased consumer spending. Retail sales in November came in nearly twice as strong as expected. The housing market and consumer confidence remain strong.
What a difference
Just over a year ago, overseas economic turmoil drew investors into government securities, pushing the yield on the 30-year Treasury bond to a lifetime low of 4.72 percent.
But the domestic economy has strengthened since then, while overseas economies have partially recovered.
In response, the Fed tightened credit three times since June but the moves have had little apparent effect.
As such, analysts foresee a series of rate hikes ahead.
Fed officials gather Dec. 21, but with the meeting so close to potential Y2K worries they are expected to keep their main lending rate unchanged at 5.50 percent. But analysts say a rate hike likely will come at the next Fed gathering in February.
With key commodity prices like oil expected to keep rising, Keith Raphael, president of Crosscurrents Investment Advisory, foresees a 6.64 percent yield on the long bond next year.
"The bears,” he said. "Are well-entrenched.”
In a report last week, Goldman Sachs (GS) advised clients to lighten up on bonds in favor of cash and commodities.
Dollar weakens
The euro rose strongly against the dollar Thursday after a key survey of German business came in stronger than expected.
The Ifo index of business confidence leapt to 98.9 in November from 96.1 in October, far exceeding forecasts for a rise to 96.9.
Just before 3:15 p.m. ET, the euro rose to $1.0164 from $1.0077 Wednesday.
Still, some say the battered euro, which has lost about 16 percent of its value since its January inception, may once again fell below $1 as it did two weeks ago
"In order for the euro to sustain this morning's rally it must successfully break above key short-term resistance,” Ruesch International said in a note to clients Thursday.
The dollar, meanwhile, fell to 103.16 yen from 103.60 Wednesday 
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