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Bonds rise ahead of Fed
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February 1, 2000: 3:28 p.m. ET
Treasurys gain as inflation concerns seem to ebb; dollar soars vs. yen, euro
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NEW YORK (CNNfn) - Treasury bonds rose Tuesday as investors bet that a modest interest rate hike by the Federal Reserve might be enough to keep near-term inflation under control.
The gains come one day ahead of the Fed's closely watched announcement on interest rates, when forecasters widely expect a rate hike of a quarter percentage point from the nation's central bank - not a hefty half-point hike.
The day's the move into bonds, analysts said, may reflect a belief that Fed inflation fighters will prove effective Wednesday, keeping yields from moving much higher for now.
"I think people believe (Fed Chairman Alan Greenspan) is not going to shock the market with a half-point rate hike," John Lonski, senior economist at Moody's Investors Service. "There's no reason to shock the credit market and the economy with a half-point rate hike."
Just before 3 p.m. ET the price of the benchmark 30-year Treasury bond rose 23/32 to 96-1/32. Its yield, which moves inversely to its price, fell to 6.42 percent from 6.48 percent Monday.
The gains came despite the latest set of reports showing the economy continues to strengthen, suggesting a possible pickup in inflation, which erodes a bond's value. The National Association of Purchasing Management said its index of manufacturing activity expanded for the 12th straight month in January. The "prices paid" component -- a measure of costs -- rose to 72.6. Separately, the Commerce Department said construction spending rose 2 percent in December.
"It's one of many indicators the Federal Reserve is watching, and it just adds to the general picture of an exuberant -- of a very, very strong economy indeed," Robert Heller, former Federal Reserve governor and president of International Payments Institute, told CNNfn.
Heller spoke on the same day the U.S. economy entered a record 107th month of expansion, surpassing the previous record of uninterrupted growth that began in the 1960s.
While unemployment is at a 30-year low and consumer confidence and spending is high, actual inflation remains tame. But analysts say the current pace of growth may be unsustainable. They note that the Fed's three rate hikes last year, which brought its main lending rate to 5.50 percent, haven't appreciably slowed the pace.
"We have a lot of economic momentum," Reinhard told CNNfn's Ahead of the Curve. "So we think that the Fed is going to have to continue tightening two more times this year, or a total of 75 basis points (three-quarters of a percentage point) in the first half of the year, in order to stay at the curve."
Evidence of that momentum came Friday when the nation's gross domestic product, the broadest measure of the economy, and the employment cost index, a measure of wage inflation, soared past analysts' expectations.
As such, Heller, the former Fed governor and president of the International Payments Institute, is calling for modestly tighter credit.
"What is called for at the present time is prudence in fiscal policy and a continued application of the brakes in Federal Reserve policy," Heller said. "That's the policy that will get us into a future that where we see continued growth and very moderate inflation."
Unstoppable dollar
The dollar Tuesday continued its stellar run against the major currencies, climbing to a three-and-a-half-month high against the yen and pushing the euro near its lifetime lows.
Just before 3:p.m. ET, the dollar rose to 107.84 yen from 107.34 Monday. The euro traded at 97.14 cents, little changed from Monday's 97.33 cents, and just slightly above its all time intra-day low of 96.67 cents. The 11-nation currency is now down about 16 percent from its inception price early last year.
Analysts link the dollar's strength to continued evidence that the U.S. economy continues to outperform its overseas counterparts, raising the prospect for higher interest rates ahead. Higher rates make dollar-denominated securities, which must be bought in local currency, more attractive to overseas investors. 
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