Upbeat Greenspan Shakes Up Bonds
After creeping higher for several days, Treasury bond yields rocketed Thursday as Federal Reserve Chairman Greenspan delivered more upbeat news on the economy than bond traders could bear.
But the stock market largely took the rise in yields in stride: Key indexes closed just modestly lower, with the Dow industrials losing 48.92 points, or 0.5%, to 10,525.37.
In currency trading, the yen scored its biggest one-day gain against the dollar in three years, as rebounding Japanese stocks lured capital back to that country.
The bond market provided some of the day’s biggest fireworks, as traders pushed longer-term yields sharply higher, sensing that a reviving economy will lift interest rates across the board.
The 10-year T-note yield, which had bounced between 4.8% and 5.2% for three months, jumped from 5.05% on Wednesday to 5.22%, its highest since July.
The 10-year T-note is a benchmark for mortgage rates, which means home buyers may face higher loan rates soon.
The two-year T-note leaped to 3.42% from 3.23%.
Analysts said the trigger for the rate surge was a shift in tone by the Fed boss: Last week he said the economy was “close to” recovery, but on Thursday he told the Senate Banking Committee that a rebound is “well underway.”
“Greenspan is always understated and reserved, so laymen won’t detect a dramatic shift in content. But I viewed this as very significant,” said economist Michael Moran at Daiwa Securities America in New York. “He seemed to imply he was really thinking differently than a week ago.”
In recent days, fresh data on the economy have been stronger than most analysts expected. Another key report is due today, when the government reports on February employment trends.
All last year, the Fed’s official “bias” was to minimize the economic downturn by continuing to cut short-term interest rates. Many analysts now expect the central bank’s bias to change to “neutral” at its next meeting, March 19--a first step toward raising short-term rates to keep the economy from heating up to the point that inflation could begin to threaten.
The Fed cut its key short-term interest rate to a 40-year low of 1.75% in the weeks after the Sept. 11 terrorist attacks--an emergency measure that, as Moran said, “can’t hold forever.”
Still, many experts believe Greenspan would prefer not to have to tighten credit before summer at the earliest. And despite Thursday’s spike in bond yields, most analysts expect only moderate increases in market interest rates in the near term. They said that continued low inflation and a report Thursday showing that business productivity grew 5.2% in the fourth quarter should keep a ceiling on the bond market.
Higher productivity allows businesses to make more money without raising prices.
“I think the bond market may be a little over-worried here,” said Jay Mueller, an economist at Strong Capital Management in Milwaukee. “With inflation practically zero and productivity strong, I don’t think bonds should have too much trouble.”
But a sliding dollar could pose problems for the bond market because a weak buck could fuel inflation in imported goods.
The dollar has been the strong man of world currencies in recent years, but it suffered a big hit Thursday, tumbling to 127.05 yen from 130.88 on Wednesday after another surge in Japanese stocks.
The Nikkei index rose 2.6% Thursday, boosting its gain this week to 7.7%, as good news for the U.S. economy generated optimism about Japan’s outlook. Early today, the Nikkei was up 1.6% to 11,842.
Sudi Mariappa, global portfolio manager at Pimco bond funds in Newport Beach, said a number of other factors in Japan were supporting the yen, including a rise in the country’s leading economic indicators, strong government support of stocks and banks, and profit taking by speculators who had bet on a strong dollar and cleaned up as the yen recently bottomed out at 135 per dollar.
Some Japanese investment managers are selling foreign holdings to invest in Japan as “window dressing” for their portfolios before the country’s fiscal year ends March 31, analysts said.
After mostly poor economic news in Japan since 1989, “the most likely case is that international investors are underweighted in the Japanese markets,” Moran said. “When you start getting the sense that things are turning, there could be a rush of investment into Japan.”
But if stock buyers are turning positive on Japan, they have even more reason to be so about the United States, said economist Doug Duncan at the Mortgage Bankers Assn., who this week raised his U.S. growth forecast for the year to 3.5% from 1.5%.
Wall Street was largely unshaken Thursday by the rise in bond yields. Winners and losers were nearly even on the New York Stock Exchange. On Nasdaq, the composite index slipped 8.77 points, or 0.5%, to 1,881.63, but still is up 4.4% this week.
Calling the productivity numbers “unparalleled for a recession,” Duncan also noted the recent surge in activity in both the manufacturing and service sectors. The data suggest depressed corporate earnings could begin to recover sooner rather than later, analysts say.
The economy’s recovery will cause the Fed to begin raising rates again at midyear, Duncan predicted. That will take mortgage rates higher as well, he said. Mortgage rates have stayed below 7% for five straight weeks. This week, the average 30-year loan rate rose to 6.87% from 6.8% last week, Freddie Mac said Thursday.
Duncan expects the surge in Treasury yields to push the average mortgage rate above 7% next week. He believes, though, that mortgage rates will remain cheap by historical standards, averaging 7.3% in the third quarter.
Market Roundup, C6-7
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