Bonds like PPI, strong dollar
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March 12, 1999: 9:26 a.m. ET
Negative inflation, euro retreat encourage sporadic Treasury buying
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NEW YORK (CNNfn) - Treasury traders got a welcome wake-up call Friday in the form of economic statistics showing that U.S. price inflation is actually decreasing, putting bond prices back on the upward trail.
According to the Labor Department, the February producer price index showed prices declining by 0.4 percent overall, a dramatic slide compared with last month's 0.1 percent price inflation. Excluding food and energy, the index remained flat, showing 0.1 percent inflation.
Because economists had expected the overall figures to show deflation at a milder level of 0.1 percent, investors were pleasantly surprised by the decline, buying into suddenly attractive fixed-income securities like Treasury bonds.
By 9:00 a.m. ET, the benchmark 30-year Treasury bond was up 11/32 of a point in price at 95-25/32, while the yield sank back to 5.53 percent.
The rally concentrated at the high end of the yield curve, sending 10-year notes up 6/32 to yield 5.18 percent, while two-year paper inched up a grudging 1/32 to yield 5.02 percent.
"It's very encouraging to see a negative PPI," said Susan Hering, chief economist at Carr Futures. "People just aren't in the mindset to expect prices to rise sharply."
According to Hering, minimal inflation should help keep Treasury yields down, especially after the market had already braced itself for an interest rate hike that will now probably not materialize in the next few months at least.
Despite the bond market's apparent enthusiasm, traders noted that the gains may be fleeting in the face of Wall Street's push toward the record 10,000 Dow level. If the stock surge continues, some asset reallocation could appear as investors feed the Dow with inflows originally earmarked for the Treasury market.
Dollar back in play
The dollar reasserted itself against other global currencies, knocking the euro off Thursday's two-week high as elation over Oskar Lafontaine's resignation as German finance minister gave way to worries that the departure would not be enough to save Europe from interest rate cuts ahead.
Lafontaine resigned from his post Thursday, sparking rejoicing throughout the European investment community. The euro soared more than 2 cents off its intraday lows, its largest single-day push ever.
However, Friday brought the sobering realization that the European Central Bank (ECB) is now even more likely to lower interest rates in Lafontaine's absence. The German minister was a strident advocate of lower rates, leading the ECB to behave in a contrary manner in order to avoid looking like a tool of German fiscal policy.
With Lafontaine gone, pan-European monetary authorities now may see their way clear to cut rates anyway, artificially curbing the euro's official value and thereby depressing speculative demand.
By 9:00 a.m. ET, the euro had stumbled back to $1.0902 from its previous close of $1.1043.
The yen, meanwhile, got little comfort from data showing that Japan remains in a state of economic recession. According to the Economic Planning Agency, the Japanese economy shrank 3.2 percent in fourth-quarter 1998, a record fifth straight quarter in retreat.
Dollar bulls celebrated the news, pushing the greenback up to 119.74 yen from its uninspired Thursday close of 119.12.
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