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Inflation relief aids bonds
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August 13, 1999: 3:55 p.m. ET
A weaker-than-forecast PPI sends Treasurys soaring more than one point
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NEW YORK (CNNfn) - United States Treasury bond prices soared Friday after a report suggested inflation remains subdued.
Just before 3:30 p.m., ET, the price of the 30-year benchmark bond rose 1-2/32 to 100-7/32.
Its yield, which moves in the opposite direction from its price, fell to 6.10 percent from 6.19 percent Thursday.
The gains came after the Labor Department said prices charged by the nation's producers rose at a lower-than-expected rate in July.
In the week's most closely watched economic indicator, the producer price index climbed 0.2 percent. The core rate, which excludes the volatile food and energy sector, was unchanged.
"We got the spark from the PPI today," said Harvinder Kalirai, economist at IDEA Global.com.
Leading up to the report, bond prices fell in three of the last four sessions, pushing yields to 21-month highs. Explaining these sell-offs, analysts partially cited worries that a strong PPI reading would ignite fears of rising inflation, which makes bonds less attractive.
But while Thursday's report calmed some of those fears, it is unlikely to change economists' predictions that the Federal Reserve's policy making committee will raise short-term interest rates by a quarter of a percentage point when it meets Aug. 24. Already, the Federal Open Market Committee increased the federal funds rate by a quarter point to 5 percent in June in a move to thwart inflation.
"We don't think it'll be enough to halt a move at this month's FOMC meeting," Kalirai said of the PPI numbers. "We still look for the Fed go 25 basis points."
And that may not be the last of it.
"Our view is that at the minimum, the Fed has to completely unwind the 75 basis points of easing that it enacted last year," Kalirau continued. "So we got one more rate hike in August of this year and at least another one."
But Mary Adamski, bond strategist at Dain Rauscher, said one rate hike may be the last for a while.
"The vast majority of the people on the Street are saying that 25 basis points is pretty much going to happen," Admaski said." I will tell that you 25 basis points is built into the market. I think October probably doesn't happen."
The FOMC meets again in October.
The interest rate picture may become clearer Tuesday when one of the most closely watched inflation gauges, the Consumer Price Index, is forecast to show a 3 percent gain for July.
Dollar strong
What's good for bonds was good for the dollar.
The U.S. currency rose against the major currencies Friday, bolstered by the PPI report, which lessened fears of inflation.
After rising to two-week highs against the major currencies Thursday, the greenback continued to make gains. The euro slipped to $1.0568 from $1.0674. The dollar, meanwhile, edged up to 115.66 yen from 115.35.
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