Greenspan comforts bonds

June 17, 1999: 4:05 p.m. ET

Yield sinks back to 5.95% as Fed chief quells fears of multiple rate hikes
By Staff Writer Robert Scott Martin

NEW YORK (CNNfn) - Bond prices soared Thursday afternoon after Federal Reserve Chairman Alan Greenspan hinted that he will raise interest rates later this month, but said little to feed fears of more rate hikes thereafter.
     Shortly after 3 p.m. ET the benchmark 30-year Treasury bond leapt 1-13/32 points in price to 90-7/32. The yield, which travels in the opposite direction, sank to 5.95 percent, crossing back under 6 percent for the first time in over a week.
     Joel Kent, Lehman Brothers economist, laid credit for the rally squarely on Greenspan, calling the Fed chief's comments "probably the clearest in a while."
     According to Kent, Greenspan's testimony to the Joint Economic Committee indicated that the Fed's Open Market Committee (FOMC) will indeed vote to raise interest rates when it next meets at the end of June, but also implied the rate panel will move slower than investors had feared.
     Tipping the Fed's hand
     Concerns over rates have put financial markets on a sharply defensive track since the FOMC adopted a bias toward higher interest rates nearly a month ago. Rate-sensitive bonds have suffered especially acute rate pains, with yields, which reflect long-term interest-rate trends, soaring to 19-month highs in recent days.
     Wednesday's release of unexpectedly subdued consumer inflation data eased these fears somewhat, giving bonds a much-needed relief rally and encouraging investors to speculate that the Fed will raise rates only once rather than multiple times this year.
     In the eyes of the bond market, Greenspan confirmed this speculation in the question-and-answer portion of his Thursday testimony, saying the current rate climate was not going to resemble 1994, when the FOMC hiked the key funds rate six times for a total of 2.25 percent.

Rate outlook still clouded
     Despite the day's relief for bonds, some market watchers warned that the long-term outlook remained uncertain and potentially bearish for the Treasury market as long as the FOMC keeps its tightening bias.
     "It may be even more that one (rate hike)," said Stephen Gallagher, director of economic research at Societe Generale. "If they move once there is always another chance for another one, but I think the message that we got from Greenspan today is that it will not be an aggressive increase in rates."
     The certainty of higher official interest rates also did little to help consumer fears that it will soon become both more difficult and more expensive to make large purchases on credit. Mortgage rates followed bond yields up to a two-year high Thursday, indicating that investors' rate relief will be slow to filter down into the retail sphere, and higher rates will only lock higher finance costs into the consumer lending market.
     In the meantime, traders seemed willing to bet that bonds -- and the broader investment picture -- could see brighter times ahead.
     A rate hike of 25 basis points "won't make much difference to either the economy of the financial markets," said Bruce Steinberg, Merrill Lynch chief economist. "We believe bond yields will move lower as the year proceeds, and that should help out the equity market."
     Greenspan's speech left the market largely unimpressed by the morning's lackluster assortment of economic numbers. The U.S. trade deficit came in flat at $18.94 billion in April, falling under forecasts of $19.8 billion but still ominously close to March's record level of $18.95 billion.
     Separately, the labor market tightened appreciably, with the number of first-time jobless claims slipping to 299,000 from 323,000 the previous week. The bond market, which looks warily at signs that jobs are becoming scarcer, had steeled itself to see the number drop to 308,000.
     Dollar sinks in disappointment
     Currency traders took little comfort from Greenspan's veiled promise that rates could see only a minimal uptick this year. The dollar tumbled against the yen and went on the run from the euro as European traders bought back into a strong reading of German business confidence.
     The German Ifo report of business sentiment climbed to 90.4 in May, edging off a 30-month low of 89.7 in April. As a result, the euro enjoyed a brief boost, but was soon treading back near its lifetime lows at $1.0301 in early U.S. trading.
     The yen, meanwhile, retained its recent ebullience, pushing the dollar down more than a full yen to 119.28 yen from its previous close of 120.37.
     Traders said yen bulls were defying fear the Bank of Japan would enter the market to buy dollars for the third time in a week. Japanese monetary officials have repeatedly decried their currency's surging value, encouraging the BOJ to intervene in order to keep the yen under wraps.
     However, fear of the BOJ was not enough to dissuade speculators from selling dollars after Greenspan quashed their most optimistic rate-hike hopes. Rising U.S. interest rates make the dollar more valuable compared to other global currencies, which suffer from flat or declining local rates.