NEW YORK (CNN/Money) - U.S. Treasury bond prices mostly rose Wednesday as a favorable inflation and interest-rate outlook encouraged buying, while the dollar hit another low against the euro.
Around 3:20 p.m. ET, the benchmark 10-year note rose 1/4 of a point in price to 100-17/32, to yield 4.18 percent, down from 4.23 percent late Tuesday. The 30-year bond climbed 20/32 of a point to 105-1/8, yielding 5.02 percent, down from 5.07 percent late Tuesday.
The two-year note was unchanged at 100-1/8 of a point, to yield 1.80 percent, and the five-year note added 3/32 to 100-29/32, yielding 3.17 percent.
Meanwhile in the currency market, the euro climbed to a new record high against the dollar as the greenback continued to sell off in the face of low interest rates in the United States compared with its peers.
The euro rose against the dollar to $1.2398 around 3:20 p.m. ET, up from $1.2323 late Tuesday. The day's new high marked the euro's 12th record high in the last 14 trading sessions. The greenback also fell against the yen, buying ¥107.43, down from ¥107.52 late Tuesday.
"We're basking in the glow of negative inflation in the month of November," William Sullivan, economist and executive director at Morgan Stanley, told Reuters.
The biggest issue for bond traders was assessing when the Federal Reserve Bank might raise interest rates. Tuesday's low inflation reading -- the core CPI fell 0.1 percent in November, its first decline in 21 years -- boosted dealers' confidence that rates would stay steady far into 2004.
With the year-to-year core CPI rate edging down to 1.1 percent from 1.3 percent, it is "harder to tell aggressively bearish stories on the outlook for the Fed funds rate and Treasurys," said Rory Robertson, interest-rate strategist at MacQuarie Bank's debt markets division in Sydney, in a newsletter. "It reinforces my view that the Fed will not raise rates in 2004."
Sullivan pointed to follow-through demand for Treasurys, particularly in the long end, because the November inflation report has focused attention on real returns.
"The absence of any meaningful inflation has shored up the market's confidence that this improvement in the inflationary environment is sustainable," he said.
The November inflation data were particularly compelling because the drop in the cost of living occurred against a backdrop of rising commodities prices, "superheated growth" in the third quarter, and a weaker dollar, Sullivan observed.
"And yet there is such competition at the retail level of the economy that prices dropped across the board," he said.
That dynamic has crucial implications for the Fed's decision-making, Sullivan told Reuters.
"If inflation remains low, they can sustain an accommodative policy for a considerable period," he said.
With strong economic data, supply and a Fed policy meeting behind it, the market is in the midst of a relief rally heading into the end of the year and into early 2004, RBS Greenwich Capital market strategist Peter Teague told Reuters.
Technical momentum supported the upward trend because traders waiting for Treasury prices to go down have gotten frustrated and are having to cover positions, analysts said.
"Too many people are still invested short for the same economic reason: that strong economic growth means the Fed must tighten," said Teague, arguing that decline in the November core CPI reading reported on Tuesday "makes the 'no Fed in 2004' thesis even more solid."
If the Treasury market is proving resilient in the face of strong economic data like November's industrial production and housing starts report, it could do even better if there were an overtly friendly development for Treasurys such as weaker-than-expected economic news, analysts said.
"The way the market is performing now sets the stage for a big rally if there are any data that prove disappointing on the economic outlook in the coming weeks," Sullivan said.
There was not much economic news due Wednesday, but investors did get some news on mortgage activity.
The Weekly Mortgage Market Index climbed 12.6 percent from the prior week to 677.2, while the refinancing index jumped 16.8 percent to 2,072.9.
-- Reuters contributed to this report.
|
