NEW YORK (CNNfn) - United States Treasury bond prices soared Tuesday after a report suggested that inflation remains tame.
Just before 3:30 p.m. ET, the price of the 30-year benchmark bond rose 1-1/32 to 101-16/32.
Its yield, which moves in the opposite direction from the price, fell to 6.01 percent from 6.08 Monday, one of the lowest yields this month.
The strong gains came after the Consumer Price Index, a broad measure of cost of living changes followed closely by the Federal Reserve, rose modestly and in line with analysts' forecasts.
The CPI gained 0.3 percent in July after remaining unchanged in May and June. The core rate, which excludes the volatile energy sector, rose 0.2 percent, also as expected.
The modest increase, which comes just two trading session's after another report showed that price increases at the producer level remain in check, painted a picture of low inflation, making bonds more attractive.
That view in turn solidified the belief among some analysts that the Federal Reserve's policy-making committee will raise short-term interest rates just once during the remainder of the year -- by a quarter of a percentage point on Aug. 24.
'This number does not change our view, namely that the Fed is likely to raise interest rates at next week's meeting by 25 basis points," Kathleen Stephansen, senior economist at Donaldson Lufkin Jenrette.
But Joseph Lavorgna, senior economist with Deutsche Bank Securities, said the benign number may not be enough to keep the Fed from raising rates when it meets again in October.
"Well, I think the market in some ways, this could be a head fake as far as the market rallying short term," Lavorgna said. "You'll still see higher yields over the course of the year. Mainly because the Fed will not only raise rates next week, but also in October. I might also add that the global outlook looks a lot better. And with the global economy recovering, you should start to see more commodity pressures and you'll probably see higher inflation in 2000.
Faced with growing evidence of rising inflation and tight labor markets, the Federal Open Market Committee increased the federal funds rate by a quarter point -- 25 basis points -- to 5 percent in June in a move to stem rising prices.
The day's other economic indicators had no apparent market effect.
In the first report, the Commerce Department said housing starts rose 5.7 percent in July to an annualized rate of 1.661 million units, ahead of expectations.
Industrial production climbed 0.7 percent after a 0.1 percent rise in June, the Federal Reserve said.
The Buffett effect?
Also Tuesday, the market learned Berkshire Hathaway, the investment company run by Warren Buffett, increased its holdings of fixed-income securities in the second quarter to $30.3 billion from $21.2 billion.
But George Morgan, a vice president with Kirkpatrick Pettis who follows Berkshire, said the increase should not be interpreted as bullishness on Buffett's part for bonds.
Rather, Morgan said the shift to the vaguely described "fixed-income securities," which could be securities with very short-term maturities, is more likely an indication that Buffett is accumulating liquid assets to finance an acquisition.
That interpretation comes in contrast to the conventional one two year's ago, when Buffett's large purchase of zero-coupon bonds signaled to investors the famous investor's bullishness for bonds.
Berkshire Hathaway declined to comment. News of the shift came from a regular quarterly filing with the Securities and Exchange Commission.
More supply
Also Tuesday, the Treasury's Department's $10 billion auction of 52-week bills produced a yield of 4.945 percent. The bid/cover, a measure of demand for the securities, was 2.88 versus, lower than the 3.77 at the last bill auction.
And in other bond supply news, DaimlerChrysler priced $4.5 billion in corporate debt Tuesday. A tranche of securities maturing in 2002 were priced to yield 27 basis point above the London Interbank Offered Rate. Another tranche, $1.5 billion in securities maturing in 2004, were priced to yield 6.90 percent, while a third segment of $2 billion of bonds maturing in 2009 yielded 7.20 percent.
Dollar higher
The news of tame inflation, which makes United States equities attractive, pushed the dollar against the major currencies Tuesday.
The euro fell to $1.0518 from Monday's close of $1.0581. The yen, meanwhile, dipped to 114.04 from 114.58.
|
