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Bonds revel in rate news
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June 30, 1999: 3:26 p.m. ET
Fed's reversion to neutral stance spurs strong relief rally for Treasurys
By Staff Writer Robert Scott Martin
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NEW YORK (CNNfn) - Bond traders rejoiced Wednesday after the Federal Reserve reassured financial markets that the day's mild interest rate hike would be the last for a while.
Shortly before 3 p.m. ET, the bellwether 30-year bond surged 26/32 of a point in price to 89-22/32. The yield, which travels in the opposite direction from the price, tumbled to 5.99 percent.
The Fed's Open Market Committee (FOMC) voted to raise its target for the key federal funds rate, the rate at which banks make overnight loans to one another, a quarter percentage point to 5 percent. Bond traders had widely expected and discounted the decision, anticipation of which has helped push bond yields higher in recent weeks.
However, the FOMC surprised many investors by returning to a neutral stance on future rate decisions, abandoning the tightening bias it adopted last month. The news cheered the rate-weary bond market, which had nervously looked toward the possibility of additional rate hikes in the near future.
Indeed, analysts have repeatedly said bonds have priced in not just Wednesday's rate hike but the bearish chances of a similar increase in late August. Now that an August rate hike looks unlikely at best, bonds looked grossly undervalued, encouraging investors to leap out of the sidelines and buy back into Treasury debt.
Outlook still murky
Despite the market's initial euphoria over the news -- the bond soared nearly a full point after the Fed issued its terse release -- many bond traders remained nervous.
Wednesday's release of Chicago-area manufacturing data indicated that the depressed U.S. industrial sector is still undergoing a profound revival, feeding the bond market's gloomy conviction that the FOMC will probably raise rates again, later in the year if not in August.
According to the National Association of Purchasing Management, the Chicago purchasing index climbed to 60 in May from an April reading of 57.9. As a reading of above 50 reflects an expansion in industrial activity, bond traders feared that the national index, due Thursday, could show a similar increase. This in turn would indicate that the U.S. economy is now expanding in all directions at once, a situation which would almost certainly encourage inflationary pressures and prompt another Fed hike.
The FOMC itself seemed to encourage this caution, saying it would remain "especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth" even though its tightening bias no longer loomed directly over the market.
Japan to raise rates too?
The Fed news came scant hours after Bank of Japan (BOJ) Governor Masaru Hayami indicated that higher interest rates may also prove "appropriate" for Japan now that the once recession-plagued Japanese economy has, in his words, "clearly stopped deteriorating."
Japanese interest rates have labored at effectively zero since February, when the BOJ lowered the key overnight call rate to 0.15 percent -- or zero after fees and charges -- in order to buoy the battered Japanese bond market.
As a result of Hayami's comments, Japanese bonds went back on the defensive, pushing the benchmark 10-year Japanese government bond yield up to 1.99 percent, its highest level since February.
The yen, however, cheered the possibility that Japanese rates soon could climb out of the basement to achieve greater parity with rising U.S. rates. Because interest rates indicate the cost of dealing with money, higher rates make it more profitable to own the currency in question.
In late U.S. trading, the dollar slipped to 121.05 yen from 121.07, while cross trading pushed the euro up to $1.034 from $1.0318. 
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