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Markets & Stocks
Bonds fall after Fed news
December 21, 1999: 4:02 p.m. ET

Treasury yields soar to 2-year high on concern of more rate hikes ahead
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NEW YORK (CNNfn) - Treasury bonds fell Tuesday after the Federal Reserve signaled concern about rising inflation, suggesting a series of interest rate hikes lies ahead.
    As expected, the Fed left its main lending rate unchanged at 5-1/2 percent, fearful of upsetting markets ahead of the century change. And in a surprise to analysts, the central bank, citing potential Y2K disruptions, declined to shift to a tightening bias on future rate hikes.
    But in language contained in its statement, the Fed expressed concern that the nationís booming economy will lead to rise in inflation, mandating more rates hikes ahead.
    "If you read the statement, itís purely Y2K,Ē said Josh Stiles, bond strategist at IDEA Global.com, referring to why the Fed didnít hike rates or shift to a tightening bias. "They are no less worried (about inflation) than they were the last time.Ē
    Thatís when Fed on Nov. 16 hiked its main lending rate by a quarter of a percentage point, its third rate hike this year.
    Bonds, up nearly half a point before the Fed released its statement, fell moments later.
    Just before 3:30 p.m., ET, the price of the benchmark 30-year Treasury bond lost 8/32 to 95-20/32. Its yield, which moves inversely to its price, rose to a two-year high of 6.46 percent from 6.43 percent Monday.
    The Fedís refusal to adopt a tightening bias struck some analysts as confusing, particularly since the market was prepared for one.
    "So there is a 'de facto' bias but not a 'de jure' one,Ē said †Ian Shephardson, U.S. economist at High Frequency Economics. "Will this sort of hair-splitting really save the markets from turmoil if Y2K kills the world's computers?"
    But Anthony Crescenzi, bond strategist at Miller Tabak & Co. said the Fed, by not shifting its policy directive, may have lost credibility as an inflation fighter.
    "The message is clear,Ē he said. "The stock rally is evidence that they wonít be raising rates aggressively. In the bond market thereís the sense of betrayal of the vigilance that many would like to see. The feeling is that the Fed is moving too slowly.Ē
    The Fedís three rate hikes since June have had little apparent effect on slowing growth. Unemployment remains near a 30-year low, consumer spending has stayed strong, and the surging stock market has created trillions of dollars of new wealth -- at least on paper. All along, bond prices have reflected this inflation-suggesting strength, losing value with each rate hike for one of the worst years on record.
    
Dollar mixed

    The dollar remained mixed Tuesday, showing little response to the Fedís interest rate decision. Just before 3:30 p.m., ET it cost $1.0085 to buy one euro, a 0.43 percent gain in the dollar's value from $1.0135 Monday. The U.S currency, meanwhile, fell to 102.14 yen from 102.56 Monday
    In a note to clients Tuesday, Ruesch International said the dollarís behavior ahead will be influenced by U.S. stock market performance.
    With stocks rising through 1999, overseas investors have generally driven up the value of the U.S. currency, which must be used to buy U.S. stocks.
    While many economists are bullish on U.S. market performance, a series of interest rate hikes could curb the marketís rally, affecting the dollar. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: √ā¬© 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices √ā¬© S&P Dow Jones Indices LLC 2018 and/or its affiliates.