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Bonds soar on tame CPI
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August 17, 1999: 9:26 a.m. ET
A modest rise in consumer prices leads to bond market rally
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NEW YORK (CNNfn) - Treasury bond prices soared Tuesday morning after the week's most closely watched economic indicator showed inflation remains in check.
Just before 9:15 a.m. ET, the price of the benchmark 30-year bond rose 26/32 to 101-9/32.
Its yield, which moves in the opposite direction from the price, fell dramatically to 6.03 percent from Monday's close of 6.09 percent.
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.
Analysts had expected modest CPI gains to spark a bond rally, which is exactly what happened Friday when another report showed prices at the producer level remained tame.
"I think [a tame CPI increase] would give the market a further sign of relief and could give the bond market a boost," Tom Benfer, an analyst at Bank of Montreal, said before the release.
However, Tuesday's CPI results may not be enough to change the view among analysts 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.
"Well, I think the Federal Reserve has pretty much talked itself into another 1/4 point move on the Federal funds rate," Neal Soss, chief economist at Credit Suisse First Boston, said before the release.
But the benign number may be enough to keep the Federal Reserve from raising rates when it meets again in October.
"We'll have to watch the data closely now between Aug. 24 and Oct. 4 to see how strong the numbers are," Benfer said. "So it's going to be key now on how strong the economy looks going into October whether or not they would move again by another quarter point in October. So I think that's the question mark: Do they go 50 (basis points) or do they go 75 basis points for this year?"
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.
In the day's other economic indicator, 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 gained 0.7 percent after a 0.1 percent rise in June. Capacity utilization, meanwhile, rose to 80.7 percent from 80.3 percent in June.
Dollar mixed
News of tame inflation wasn't enough to push the dollar higher against the major currencies.
Just before 9:15 a.m. ET, the dollar rose to 114.63 yen from Monday's close of 114.53.
But the dollar fell to $1.0499 euros from Monday's close of $1.0581. 
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