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Bond Yields Tumble After Election Ruling, Retail Slowdown Report

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From Reuters

The U.S. bond market rallied strongly Wednesday after a report showing a drop in November retail sales reinforced expectations that a slowing economy will prompt the Federal Reserve to soon cut interest rates.

U.S. Treasuries quickly reversed modest losses suffered overnight after the U.S. Supreme Court, in a narrow ruling late Tuesday, dealt a devastating blow to Democrat Al Gore’s hopes of winning the disputed presidency.

Fixed-income investors, weary after five weeks of political and legal wrangling, turned their attention back to economic fundamentals, which remain very supportive of bonds.

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“People were stuck on this political scenario where the inevitability of a Bush win would be bullish for stocks and bearish for bonds,” said Sadakichi Robbins, head of global fixed-income trading at Bank Julius Baer in New York.

The yield on the benchmark 10-year Treasury note tumbled from Tuesday’s close of 5.35% to 5.25%, its lowest level since mid-1999. Yields on other maturities also fell.

The U.S. Commerce Department said retail sales fell 0.4% last month, compared with a flat reading in October. Economists in a recent Reuters poll had expected 0.1% growth in November.

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Conventional wisdom on Wall Street is that Bush’s proposed $1.3- trillion tax cut over 10 years would stimulate the economy--helping boost sagging stock prices--but eat into government coffers.

That, in turn, could jeopardize a program of fiscal restraint in Washington, which Gore had vowed to continue and which has propped up Treasury prices for most of this year.

“That’s been dealt with . . . and it’s a secondary factor. The fundamentals are very tough on stocks right now and very bullish for bonds,” Robbins said. “And it’s not just domestic. It’s global.”

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The Fed raised interest rates six times between June 1999 and May to the federal funds overnight bank lending level of 6.50%, in an attempt to prevent economic growth from overheating. Many bond market players are now betting economic growth has slowed enough to prompt the Fed to cut rates early next year.

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Rates Fall

Bond yields continued their recent decline Wednesday as further evidence of a slowing U.S. economy led fixed-income investors to bet that the Federal Reserve may soon lower interest rates.

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Yield on the 10-year U.S. Treasury note, weekly and latest

Wednesday: 5.25%

Source: Bloomberg News

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