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Bonds soar on econ data
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February 8, 2000: 3:17 p.m. ET
Treasurys rise, led by 30-year, after report calms concerns over inflation
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NEW YORK (CNNfn) - Treasury bonds soared more than a point Tuesday after a government report showing strong economic growth with minimal inflation helped eased investors' worst fears about Federal Reserve interest rate hikes ahead.
Bonds broke a two-day losing streak after U.S. worker productivity surged to an eight-year high in the fourth quarter and wage costs posted their biggest contraction in nearly four years, the Labor Department said.
While the news was not enough to change forecasts of a moderate interest rate hike next month, analysts said it may help keep the Federal from raising interest rates aggressively.
"They were very favorable numbers," David Ging, Treasury strategist at Donaldson Lufkin & Jenrette, said. "It really fits in with the new paradigm where the economy grows strongly and with low inflation. This takes some pressure off the Fed" to raise interest rates aggressively.
Continuing a trend from last week, the gains were concentrated in the 30-year bond, as investors continued snapping up the government's shrinking supply of long-term debt.
Just before 3 p.m. ET, the price of the 30-year Treasury bond rose 1-21/32 to 98-24/32. Its yield, which moves inversely to its price, fell to 6.21 percent from 6.34 percent Monday.
The yield on the 10-year note -- now considered the better benchmark of inflation expectations after the 30-year's big rally last week -- fell to 6.60 percent from 6.64 percent Monday.
The bond gains came amid lackluster demand for the first leg of the Treasury Department's $32 billion sale of new securities. The reduced $12.0 billion
auction of five-year notes saw a bid-to-cover ratio, a reflection of demand, of 1.90, near the six-month average.
The agency will sell $10 billion in 10-year notes Wednesday and $10 billion in 30-year bonds Thursday.
But traders Tuesday suppressed any fears of upcoming bond supply to focus on news that productivity jumped 5 percent in the fourth quarter while labor cost fell 1 percent during the period.
"These are spectacular numbers, better than the (gross domestic product) and employment reports suggested, and confirm that the labor market is not
at the moment the source of anything that could be plausibly
described as inflationary pressure," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, an economic analysis firm.
In a note to clients Tuesday, DLJ said it expects the Fed to hike interest rates by a moderate quarter percentage point in March, bringing its main lending rate to 6 percent.
"This report fits with gradual monetary policy firmings," DLJ said.
Still, Tony Crescenzi, bond strategist at Miller Tabak & Co., said the data in the long term may be bad for bonds.
"These numbers are more likely to feed the bull market in stocks than to end the bear market in bonds," Crescenzi said. "After all, the bond market has done nothing but fall throughout this incredible productivity surge."
Bonds suffered their worst year on record in 1999, a year when Fed policy makers tightened credit three times to cool the economy and preempt rising inflation. Many analysts don't see bond yields topping until the central bank is done raising rates.
The inverted yield curve -- in which shorter-term securities, such as bills and notes -- yield more than bonds, inverted further Tuesday as 30-year bonds drew the most buyers.
Investors typically demand higher yields on longer-term debt to compensate for the risk that inflation will erode the value of their holdings over time. But bond yields plunged relative to note and bill yields last week after the Treasury Department last week said it will reduce the amount of money it borrows, drawing a flood of buyers into long-term debt.
Dollar Mixed
The dollar fell against the euro Tuesday but rose to a five-month high versus the yen.
Just before 3 p.m. ET, the euro rose to 98.68 cents from 98.06 Monday, helped by a report suggesting economic strength in the euro-zone's largest economy.
The number of unemployed in Germany fell by a seasonally adjusted 33,000 to 3.96 million in January, marking a further decline following December's 72,000 drop, according to the Federal Labor Office.
The dollar, meanwhile, climbed to 109.23 yen from 108.69 Monday.
The dollar's gains against the Japanese currency come as the U.S. economy continues to outperform its overseas counterparts. United States gross domestic product jumped 5.8 percent in the fourth quarter. Japan's economy in the same period is expected to contract. 
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