Bond Yields Jump on Fed Move
Yields on long-term Treasury bonds rose Tuesday, driving the 30-year bond yield to a seven-month high, after the Federal Reserve’s fifth interest rate cut this year stoked concerns its drive to jump-start economic growth could reignite inflation.
The Fed’s decision to cut its benchmark federal funds rate to 4% from 4.5% was widely expected by financial markets. Indeed, major stock indexes--after a brief midday surge--ended the day virtually unchanged.
But bond investors, who had been looking for signs the Fed was winding down its five-month-long rate-cutting campaign, were taken aback by a Fed policy statement leaving the door wide open to more rate cuts to restore the economy’s lost vigor.
“I think people are worried about the Fed’s credibility from an inflation perspective,” said John Roberts, head of governments trading at Barclays Capital, citing renewed worries over rising costs in energy and commodities such as lumber.
“I think people were a little bit surprised that the language was still reasonably friendly toward more easing in the future,” he said.
The effect was felt most strongly in longer-term bonds, which are most sensitive to inflation worries because inflation erodes the value of fixed-rate returns. The yield on the 30-year T-bond closed at 5.91%, up from 5.85% on Monday and 5.26% two months ago.
Yields move in the opposite direction of a bond’s price.
The yield on the benchmark 10-year T-note rose to 5.50% from 5.43% on Monday--a five-month high. The yield on 10-year notes was at 4.76% in late March.
Meanwhile, the yield on two-year T-notes, which is more sensitive to the Fed’s changes in its key short-term rate, slipped to 4.24% from 4.27% on Monday.
Bonds got some support late in the day from Bill Gross, head of fixed-income management with Pacific Investment Management Co. in Newport Beach and one of the world’s biggest bond investors. He told CNBC-TV after the Fed decision that 30-year bonds at their current levels were attractive.
Bond yields have been rising since late March even as the Fed has cut short-term rates. Higher yields reflect the bond market’s view that the most aggressive Fed rate-cutting campaign since Alan Greenspan took over as chairman in 1987 is more than sufficient to engineer a recovery and could go too far.
“Now it might be time for the Fed to step back, take a deep breath, take inventory and see what happens,” said Stephen Stanley, economist at Greenwich Capital Markets. “It’s hard to perceive they have a lot of room left to cut rates.”
Meanwhile, stock prices gyrated in the wake of the Fed announcement before ending almost unchanged on the day.
The Dow Jones industrial average finished down 4.36 points, or 0.04%, at 10,872.97, while the broad Standard & Poor’s 500 index inched up just half of a point, or 0.04%, to 1,249.44.
The technology-dominated Nasdaq composite index edged up 3.66 points, or 0.2%, to 2,085.58 after jumping more than 2% initially on news of the rate cut.
Winners outnumbered losers 19 to 12 on the New York Stock Exchange and by 21 to 17 on Nasdaq, as trading volume remained moderate on both markets.
Some technology stocks jumped after the Fed rate cut was announced, then fell back.
Broadcom traded as high as $40.12 but fell back to close at $37.14, off 6 cents. Oracle rose as high as $16.50 but ended down 11 cents at $15.93. Microsoft rose to $69.30, but ended down 45 cents at $68.27.
Many tech shares have been stuck in neutral in recent weeks after surging in April.
In other trading, near-term gasoline futures fell modestly ahead of new data showing that gasoline inventories rose 2.39 million barrels last week--leaving them above year-ago levels for the first time since March, as refiners prepared for the summer travel season.
In currency trading, the dollar eased slightly against the euro after the Fed moved.
But the dollar inched up against the Japanese yen.
Market Roundup, C7, C8
