US Treasury debt prices trimmed losses on Tuesday as dealers were relieved that Federal Reserve chief Alan Greenspan largely avoided any comments bearing directly on the interest rate outlook.
The market had feared Greenspan would piggy-back on comments made by other Fed officials signaling that more interest rate hikes were imminent despite sky-high oil prices.
His failure to do so allowed benchmark 10-year notes to breathe a sigh of relief, rebounding from early losses to trade 3/32 higher for a yield of 4.28 percent, down from 4.30 percent on Monday.
"I don't see anything in the speech that is relevant to the near-term outlook," said Cary Leahey, senior managing director at Decision Economics. "When he starts talking about Adam Smith it's not something traders can make any money off of."
San Francisco Fed President Janet Yellen said earlier the central bank "must deliver" on its commitment to fighting inflation, a clear hint that further monetary tightening was in the wings.
But Greenspan's largely historical speech was a boon to bonds, leaving two-year notes off just 1/32 for a yield of 4.08, up from 4.06 percent.
Five-year notes was flat to yield 4.12 percent, while the 30-year bond was up 9/32 and yielding 4.55 percent.
In a testament to how bearish the market had become, Treasuries failed to make any headway despite the largest one-month drop in US consumer confidence in 15 years.
Many investors ignore consumer sentiment because of its spurious relationship with hard data on retail spending.
Still, given that the report on the confidence plunge was accompanied by a large drop in new home sales in August, one might have expected the market to get some sort of lift from the numbers.
Preventing any such benefit, however, was the realisation that the Fed is bent on getting interest rates higher to ward off signs of broadening inflation.
Traders said fiscal stimulus related to hurricanes Katrina and Rita meant the central bank needed to be even more vigilant in its efforts to keep price gains in check. "Whatever you thought the fed funds rate was going to be six weeks ago, it's going to have to get even higher now," argued Alan De Rose, a trader at CIBC World Markets.
Sales of new homes plunged 9.9 percent in August while the supply of those for sale surged to a record high even as prices resumed climbing, according to US Commerce Department data.
Sales of new single-family homes fell to a seasonally adjusted annual rate of 1.237 million units, the slowest pace since January, from July's record 1.373 million units. Forecasters had been looking for a decline to 1.340 million.
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