Treasury Bonds Stoked by Greenspan
Alan Greenspan told bond investors what they wanted to hear Tuesday, touching off the biggest rally in the fixed-income markets since late July.
In a morning speech at a bankers’ conference in New York, Federal Reserve Chairman Greenspan said the U.S. economy had slowed “appreciably.” Bond and stock investors saw the remarks as a signal the Fed will soon scrap its official warning that inflation poses the greatest risk to the economy, and will focus instead on whether a sharp slowdown in growth poses a greater danger.
That move, which could come as early as the Fed’s Dec. 19 meeting, could be a prelude to an eventual cut in interest rates, which many market participants see happening early next year.
“I think Greenspan wanted to tip his hand as to what the Fed’s short-term intentions were, and the markets reacted accordingly,” said Jerry Cornille, a fixed-income trader with HSBC. “The economic trend we’ve seen over the past several weeks indicated a slowing economy, and for the first time, Mr. Greenspan acknowledged this without citing any possible inflationary fears.”
In the Treasury bond market, where yields have been falling for weeks, Greenspan’s remarks might have been expected to trigger profit-taking. Instead, investors continued to rush into the bonds, driving yields lower still.
The yield on the benchmark 10-year Treasury note slid to 5.43% from Monday’s close of 5.55%, and now is the lowest since May 1999.
The 30-year T-bond yield plummeted to 5.59% from 5.70%. Shorter-term Treasury issues also rallied, with the yield on the two-year T-note falling to 5.49% from 5.60%.
It was the biggest one-day decline in yields since July 20, a rally that was also inspired by remarks by Greenspan.
The Fed raised its benchmark short-term interest rate six times between June 1999 and May of this year, to 6.50%, in an effort to slow economic growth that was deemed to be too strong to sustain without inflation.
Though the Fed has held its rate steady since May, Treasury bond yields have been sliding since June as investors, taking note of a steady stream of gloomy economic and corporate earnings reports, began to anticipate a softening in the Fed’s rate policy.
Some analysts suggested financial markets had reacted a bit too exuberantly to Greenspan’s remarks Tuesday, pointing out the Fed chief was still concerned about tight labor markets and high energy costs.
“He is not going to tighten further, but I don’t think he put forth that an easing is imminent. And the market definitely has priced in an imminent ease,” said Sadakichi Robbins, head of global fixed-income trading at Bank Julius Baer in New York.
Still, a Reuters poll conducted Tuesday showed that 17 of 25 major Treasury bond dealers expected the Fed to cut rates at least once in the first half of 2001. All 25 polled expected the Fed to move to a “neutral” stance on rates at its December meeting, but leave rates steady.
Corporate bonds also rallied on Tuesday. British Telecommunications (ticker symbol: BTY) sold $10 billion in global debt, the second largest corporate bond sale ever. The debt-ridden phone company, Britain’s largest, found about $16.5 billion of demand with more than 250 investors participating in the deal.
An additional $3 billion in corporate telecom debt is expected later this week from a unit of Verizon Communications (VZ).
Yields on corporate junk bonds eased only modestly on Tuesday, despite the sharp decline in Treasury yields.
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Sinking Yields
U.S. Treasury yields fell sharply again on Tuesday, after Federal Reserve Chairman Alan Greenspan hinted the Fed could be ready to cut its key interest rate if needed.
Monthly closes and latest for 2-year Treasury note
Tuesday: 5.49%, down 0.11
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Source: Bloomberg News
