NEW YORK (CNNfn) - Bond traders made the most of Wall Street's diffidence and offhand comments from Federal Reserve Chairman Alan Greenspan Monday, sending Treasury prices into a thin but substantial rally.
By 3:00 p.m. ET, the benchmark 30-year Treasury bond was up 22/32 of a point in price at 96-22/32, while the yield sank to 5.47 percent.
Analysts said the market was having a delayed reaction to recent reports that the U.S. economy is growing at a healthy rate while inflation remains minimal.
"As long as there is no inflation this is extremely good for the financial markets and also for the bond market," said Peter Cardillo, stock analyst at Westfalia Investment. "What we saw a couple of weeks ago was a backup due to technical factors rather than any fundamental changes."
However, it took Alan Greenspan to light the spark under this buying fire. Greenspan, the top arbiter of U.S. monetary policy, underscored last week's comments by saying Tuesday that "economic growth was robust again and unemployment and inflation edged down further."
As a result, the bond market affirmed its newfound, and still fragile, confidence that Greenspan and the Federal Open Market Committee will vote to keep U.S. interest rates unchanged when they meet March 30.
Joe Abate, Lehman Brothers economist, noted that Greenspan repeated his comment that the economy still faces "considerable upside and downside risks," indicating that the FOMC remains balanced between raising and lowering rates. However, Abate added that he does not expect higher rates in the near term.
Bullish on bonds?
As the threat of a rate hike wanes, bonds and other fixed-income securities become more attractive to investors trying to ensure the return on their capital.
"One of the things we've thought about is whether you would be better off simply buying bonds and holding them because that's a relatively low-risk investment," said Eleanor Hoagland, chief portfolio strategist at AMT Capital Advisors.
"With current yields, a diversified bond portfolio gives you a relatively certain 5, 6, 7 percent depending on what rates do. That's not too bad."
In particular, Hoagland said that bonds are growing tempting as stock valuations continue their vertiginous rise. U.S. blue chips cracked the 10,000-point level Tuesday but then slidquickly back, spurring worries that stocks could be rising too high and feeding capital flows back into the thirsty bond market.
With Treasury bonds, she said, current yield on investment "would equate to several hundred points on the Dow from here, looking out 12 months. So you would have to do better than that to want to avoid bonds . . . You'd have to be very optimistic to better that on the Dow."
Dollar flat as repatriation looms
Bond traders noted that activity remains light during the Japanese repatriation season, as Japanese investors are among the Treasury market's biggest players.
Japanese investors customarily park their funds in yen-denominated securities beginning in late February and continuing through the April 1 fiscal new year.
This year in particular, banks and other large financial institutions are under official pressure to sell off overseas securities in order to clean up their books before they can become eligible for public funds.
However, on Tuesday dollar trading was also light as the flight of Japanese capital back home temporarily ebbed. As a result, the dollar was left only minimally lower at 117.75 yen, off both its previous New York close of 117.80 yen and its overnight high of 118.49.
Currency traders noted that growing confidence in the Japanese economy also was at work in the yen's recent show of strength. Overseas investors now see the rewards in the Tokyo stock market outweighing the risks, and are wading back into undervalued Japanese blue chips.
Bank of Japan Governor Masaru Hayami confirmed that this newfound bargain-hunting urge is helping the yen, but declined to comment on what proper dollar/yen exchange levels should be.
On the other hand, the euro reacted with sublime unconcern over the surprise overnight resignation of the 20-member European Commission, the caretaker bureaucrats of the European Union.
By 3:00 p.m. ET, the European currency was in fact trading slightly higher at $1.0997 from its previous close of $1.0927. The euro had fallen as low as $1.0814 while investors adjusted to their initial shock.
-- by staff writer Robert Scott Martin