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Bonds post small gains
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June 29, 1999: 3:35 p.m. ET
Treasurys see quarter-end rally, but many traders stay sidelined pre-FOMC
By Staff Writer Robert Scott Martin
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NEW YORK (CNNfn) - Bonds floated higher Tuesday as investors found the morning's economic data reason enough to adjust their portfolios while the Federal Reserve's long-awaited interest rate decision loomed a day away. Meanwhile, the dollar recoiled from both the euro and the yen.
Shortly before 3 p.m. ET, the bellwether 30-year Treasury bond climbed 11/32 of a point in price to 88-26/32. The yield, which travels in the opposite direction from the price, eased to 6.06 percent.
Traders said the majority of market participants already had adjusted their positions and were simply waiting for the Federal Reserve's rate-arbitrating Open Market Committee (FOMC) to conclude its two-day policy meeting Wednesday afternoon.
"This has nothing to do with the Fed," said Scott Bleier, investment strategist at Prime Charter Limited. "This is all end-of-quarter window dressing."
Those investors left with the urge to dip back into the bond market got a bullish note of confidence from the mid-morning release of new home sales data and consumer confidence figures. According to the data, sales of new residential units tumbled to an annual rate of 888,000 from last month's revised level of 936,000. Meanwhile, consumer confidence, a vital indicator of the strength of the demand-driven U.S. economy, surged to 138.4 from a revised 137.7
Together, the statistics indicated not only that the U.S. economy's expansion remains under control, but that it shows long-term signs of slowing, giving expansion-weary bond traders much-needed reassurance in the Fed's shadow.
Eye on the Fed
The FOMC meeting has been an increasing focus for financial markets for weeks, with bonds in particular suffering dramatic losses as investors banked on the likelihood of at least one rate hike. The Fed is widely expected to raise the key funds rate by 25 basis points, or a quarter percentage point, to 5 percent.
Analysts say bonds already have suffered enough to withstand a 25 basis-point hike, but warn that bonds could sell off again if the rate increase turns out sharper than expected, or if the FOMC keeps its bias toward raising rates again in the future.
"I don't believe that the market is ready for serial rate increases," said Phil Dow, market strategist at Dain Rauscher Weffels. "We'll just have to wait and see what is said, but my suspicion is, right on the heels of this meeting . . . it's probably going to be a tug of war."
Despite investors' trepidation, some economists said multiple rate hikes this year were not only possible but even likely.
"I think there's a very good chance we could see the Federal funds rate rise to at least 5.25 percent by year's end," said John Lonski, senior economist at Moody's Investor Service. "If not up to 5.5 percent, which would be a complete reversal of late 1998's three-staged reduction."
Dollar under pressure
The dollar fell under renewed pressure as speculators bought yen in anticipation that the release of a major Japanese indicator next week will confirm Japan's economic recovery.
Yen bulls are betting that Monday's quarterly tankan gauge of the Japanese business climate will show continued improvement. The survey's key large-manufacturer index crawled up to minus 47 in March from minus 49, reflecting a slow revival in Japan's otherwise grim corporate sentiments.
Ahead of the release, the dollar slipped to 121.05 yen, falling nearly half a yen from its previous close of 121.50.
As in previous sessions, speculators kept one eye out for the Bank of Japan (BOJ), which has made its distaste for an overly strong yen clear through verbal statements and outright market manipulation. The BOJ has bought billions of dollars and euros alike at inflated prices over recent weeks in order to keep the yen subdued and thus support Japan's vital export sector.
The euro, meanwhile, had a harder time following the yen higher on the dollar, climbing unsteadily to $1.0333 from $1.0332.
Currency traders said weakness and uncertainty in U.S. financial markets also were contributing to the dollar's malaise. Although Wall Street has enjoyed more bullish performance in recent days, the long-term outlook remains clouded, discouraging overseas traders from investing in dollar-denominated securities.
This in turn weakens global demand for the greenback itself, at least at first. 
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