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Bonds look toward rate hike
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June 2, 1999: 3:45 p.m. ET
Dollar leaps but strong home-sales data force bond traders to watch Fed
By staff writer Robert Scott Martin
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NEW YORK (CNNfn) - The Treasury market turned away from a strong dollar to vote "no confidence" Wednesday, leaving bond prices deflating as investors took robust construction data as an omen that higher interest rates would come sooner rather than later.
After a day of mostly downward volatility, the benchmark 30-year Treasury bond was down 5/32 of a point in price at 90-14/32 shortly before 3 p.m. ET. The resultant yield edged up to 5.93 percent, its highest level in slightly over a year.
The morning's unexpectedly strong new home sales report heaped fuel on the already nervous market's selling fires, traders said. According to the Commerce Department, new home sales soared 9.2 percent on an annual basis in April, catching investors who had been looking for a slight downturn by surprise.
The statistic fed bond traders' already prevalent conviction that the Federal Reserve could vote to raise interest rates as early as its June 29-30 meeting. The market's expectations of an inevitable rate hike are currently torn between June and later in the year, but data reflecting economic expansion has encouraged traders to start pricing higher rates into bonds now.
The Federal Reserve took an active hand in the market, lifting bonds' technical prospects by buying $880 million in 30-year Treasury debt from the open market. This coupon pass artificially lowered the amount of Treasury paper available to investors, encouraging some upturn in demand.
However, even though the complete irrelevance of an afternoon speech by Fed Chairman Alan Greenspan allowed bond prices to creep into positive territory in relief, the optimism proved limited in both scope and duration, said Elliot Platt, investment strategist at Donaldson, Lufkin & Jenrette.
Market participants had earlier looked nervously toward Greenspan's speech for hints of the Fed's rate policy, but were relieved when he kept to his set topic of technology and trade.
Rising interest rates depress the effective returns bonds offer, hurting them in the estimation of investors.
Payrolls on the horizon
Ahead, DLJ's Platt said trading likely will be light until Friday's release of May employment data. Greenspan watches the labor market hawkishly for signs of wage inflation, so the employment figures -- particularly the average hourly earnings statistic -- are likely to give bond traders some hint of Fed policy to come.
Should the numbers be stronger than expected, Platt said, bond yields could easily edge above 6 percent, a level they have flirted with without touching for weeks.
Economists predict the data will show payrolls slowed their rate of increase to 216,000 from the April increase of 234,000, while hourly earnings edged up 0.3 percent.
Euro on the defensive
The promise of higher rates to come helped keep the dollar strong against other global currencies, forcing the euro in particular to a succession of fresh lifetime lows. The young European currency fell to $1.0351 in late U.S. trading after plunging as low as $1.0325.
Previously, the low point in the euro's five-month history was $1.0370, touched last Friday amid fears that the unflattering contrast between Europe's sagging outlook and the explosive U.S. economy inevitably would favor the dollar.
More significantly, the euro's newest plunge shattered the $1.0345 technical support level, setting off sirens in the minds of euro bulls who had viewed the level -- the equivalent of a 10-year low for the German mark against the greenback -- as the currency's last refuge before falling to dollar parity.
Currency traders said the euro's underlying sentiments remained gloomy, especially after the European Central Bank refused to fulfill popular expectations of an interest rate cut, leaving rates unchanged instead. The ECB also continued recent policy by offering no concrete support for the euro in the form of interventionist promises of a rescue should the currency fall too far.
As a case in point, the euro lost even more ground after Wim Duisenberg, head of the ECB, failed to offer the currency succor. In comments after the ECB rate meeting, Duisenberg refused to discuss the possibility of organized euro buying and saying only that he remains "full of confidence."
Yen eases as JGBs firm
The dollar also gained on the yen, overturning the losses suffered in Tuesday's Wall Street-inspired dollar selling to trade at 121.30 yen.
Traders attributed the reversal to a number of sentimental factors, including yen-disparaging comments from Federal Reserve Vice-Chairwoman Alice Rivlin, who said Tuesday "it is not clear" whether Japan's troubled economy has reached its low point yet.
A stronger Japanese bond market also played into the yen's retreat. Japanese government bonds (JGBs) recovered somewhat from Tuesday's dramatic downturn after an official in Japan's ruling government coalition reiterated his call for more extensive central bank bond buying.
In an interview with Reuters Television, Yoshio Suzuki, deputy policy chief of the Liberal Party, said the Bank of Japan should buy more JGBs from the market, relieving selling pressure by cutting supply "if necessary." 
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