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Bond prices slump
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January 11, 2000: 4:01 p.m. ET
Rate hike fears pressure Treasurys; yields at highest level in over two years
By Staff Writer Jill Bebar
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NEW YORK (CNNfn) - Treasury bond prices plunged Tuesday, sending yields to their highest levels in nearly two and a half years as fears of higher interest rates triggered selling across the board.
Interest rate jitters, combined with caution regarding a speech by Federal Reserve Chairman Alan Greenspan and key economic reports scheduled later this week, weighed on the market throughout the session.
Just before 3:30 p.m. ET, the price of the benchmark 30-year Treasury bond fell 1-4/32 to 92-28/32. Its yield, which moves inversely to price, rose to 6.68 percent, the highest since Sept. 11, 1997, from 6.59 percent Monday.
As the U.S. economy strengthens at a fast pace, the Federal Open Market Committee said at its last meeting Dec. 21 it would assess the possibility of policy adjustment to contain inflationary pressures. Many market participants expect the central bank to hike rates by at least a quarter of a percentage point at its next meeting Feb. 1 and 2.
The February federal fund futures contract, an indication of where traders see the central bank's main lending rate headed, has factored in a 100 percent chance of a quarter-point rate increase in February and slightly over a 30 percent chance of a half-point hike.
The Fed increased short-term interest rates three times last year in an effort to slow the economy and pre-empt inflation. Investors anticipate Greenspan's speech in New York Thursday evening may reveal whether the Fed will take a more aggressive policy stance in the near-term.
Also contributing to losses Tuesday was weakness in European bonds overnight and hawkish comments made late Monday by Richmond Fed President J. Alfred Broaddus. Broaddus said the Fed must continue to act pre-emptively in order to contain inflation.
Impact of higher interest rates
Numerous sectors of the economy, such as housing and automobiles, are sensitive to interest rates and will be affected by a hike. Higher interest rates have an impact on home buyers by raising mortgage rates. They also affect those who derive income from the housing sector such as real estate brokers and home builders.
"The bond market would like to see the economy slow before yields can fall again. If interest rates slip, it will take the edge off the robust economy we are experiencing," said Tony Crescenzi, senior market strategist at Miller Tabak Hirsh & Co.
Upside may be limited
Market participants expect any upward movement will be limited until later this week as investors await three key economic reports -- retail sales and producer prices on Thursday and consumer prices on Friday. The data should provide further clues about interest rates.
"Until we see better price action or the market shows signs of life, I expect people to sit on the sidelines. We're just not there," said Bill Kirby, trader at Prudential Securities.
Also hurting the market was a heavy supply of corporate and agency bond issuance, including sales by GMAC, the financing arm of General Motors, and DaimlerChrysler. Corporate and agency bonds are seen as attractive as their higher yields could draw investors from Treasurys.
Dollar mixed
The dollar was mixed against the major currencies Tuesday, rising against the yen and falling against the euro.
Just before 3:30 p.m. ET, the dollar exchanged hands at 105.97 yen, up from 105.18 late Monday -- a 0.8 percent gain in the dollar's value.
Meanwhile, the euro rose to $1.0327 from $1.0254 Monday, a 0.2 percent decline in the dollar's value. 
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