NEW YORK (CNNfn) - Treasury bond prices fell more than a point and a-half Monday -- sending yields to nearly two-and-a-half year highs -- on concern the Federal Reserve will enact a series of interest rate hikes to cool the buoyant economy.
With the Year 2000 transition a smooth one, investors refocused their attention on the inflation- wary central bank, which last month declined to hike rates over Y2K fears. Those fears proved unwarranted.
"Y2K has come and gone,” said Bill Hornbarger, fixed income analyst at A.G. Edwards. "The Fed didn’t do anything in December and most people are thinking they are going to get aggressive.”
Bond yields, which track the central bank’s lending rate, reflected that concern Monday, rising to a 28-month high of 6.60 percent just before 3:30 p.m. ET. The bond’s price, which moves in the opposite direction from its yield, plunged 1-18/32 to 93-24/32.
"I think the Fed has to make a bigger stand and they have to do it early,” said Bruce Alston, who manages $1.5 billion in bonds for Value Line Asset Management.
William Sullivan, a fixed income strategist at Morgan Stanley Dean Witter said he expects the yield on the benchmark 30-year Treasury bond to continue to rise in the next few weeks. (297K WAV) (297K AIFF).
Analysts see the Fed concerned that the nation’s low unemployment rate, high consumer spending and strong stock market gains will spark rise in inflation, which erodes a bond’s value.
To slow the strong pace of economic growth, Alston foresees a one-half percentage point rate hike when the Fed meets in early February, bringing its main lending rate to 6 percent.
Looking farther ahead, Byron Wien, Morgan Stanley Dean Witter’s U.S. investment strategist, told CNNfn that rate hikes totaling more than a full percentage point are possible this year.
Analysts said a weakening dollar, which fell against the yen and euro Monday, also weighed on bonds. So did a report from the National Association of Purchasing Management; while the NAPM’s headline index declined, suggesting some slowdown in manufacturing, Donaldson, Lufkin & Jenrette noted that many of the components -- including the prices paid gauge -- increased.
"These data should be taken negatively from a bond market perspective as they indicate that 1999 ended on a very strong note,” DLJ said in a note to clients.
While DLJ is bearish on bonds for 2000, A.G. Edwards’ Hornbarger calls the current market oversold.
He sees bond prices improving in the second half of January, noting that the market rallied into the Fed’s three rate hikes in 1999.
But these credit tightenings have had little apparent effect on cooling the economy. As a result, the bond market posted one of its worst years on record in 1999 as investors demanded higher yields to compensate for the expected rise in inflation, which erodes a bond’s principal and coupon payments.
Bonds have seen stiff competition from the high-flying stock market, which has lured bond investors with the promise of higher returns.
"A lot of flows have been going away from the bond market,” Michael Boss, bond futures trader at IBJ Lanston Futures, told CNNfn.
Dollar dips
The dollar fell against the major currencies Monday, dropping sharply against the euro and less strongly versus the yen Monday.
Just before 1 p.m. ET, it cost $1.0198 to buy one euro from $1.0086 Friday, a 1.11 percent fall in the dollar’s value.
Alex Beuzelin, market analyst at Ruesch International, attributed some of the dollar’s losses to Monday’s weakening on Wall Street, which tends to drive buyers away from the currency needed to purchase U.S. stocks.
"The dollar is being weighed down by the profit taking on Wall Street,” Beuzelin said.
Beuzelin also said a report showing a rise in manufacturing activity in the 11-nation euro zone helped the euro by suggesting the region continues to recover economically.
The dollar, meanwhile, fell to 101.53 yen from 102.15 Friday.
But Beuzelin said the yen’s gains may be limited as long as traders fret that the Bank of Japan will intervene to weaken its currency like it did more than a dozen times last year. 
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