Treasuries Sag as Dollar Climbs on Japan
Fri February 20, 2004 10:37 AM ET
By Wayne Cole
NEW YORK (Reuters) - Treasuries recoiled on Friday as a jump in the dollar was seen as reducing the likelihood of intervention from Asian central banks, suggesting they would have less dollars to invest in U.S. debt.
Asian central banks, and particularly the Bank of Japan, have been huge buyers of Treasuries in recent months as they sought to limit export-damaging gains in their currencies against a sliding dollar.
But the dollar rallied sharply on the yen on Friday after the Associated Press reported that Japan had raised its terror alert status to its highest level and deployed heavily armed police to airports and nuclear facilities.
That led traders to assume the BOJ would have less need to intervene, a blow to bonds given the central bank has easily been the biggest single buyer of Treasuries in the last year.
The two-year note eased 2/32 in price, taking its yield to 1.69 percent from 1.65 percent on Thursday. Five-year notes lost 6/32, leaving its yield at 3.04 percent from 2.99 percent,
The benchmark 10-year slipped 12/32, taking its yield up to 4.08 percent from 4.03 percent. The 10-year note has tried and failed several times to break below 4.00 percent, a level which has become a sturdy floor in recent months.
The 30-year bond lost 22/32, lifting its yield to 4.94 percent from 4.90 percent.
Earlier, bonds briefly faltered when U.S. inflation figures came in a little higher than expected, though core annual rates stayed at historic lows.
Reaction in the Eurodollar market, where prices eased only slightly, suggested investors doubted the data made it more likely the Federal Reserve would hike rates any time soon.
Indeed, Fed Bank of St Louis President William Poole was saying much the same in a speech on the economy early Friday. He said there was no reason not to expect benign inflation this year and reiterated the Fed's stance that it could afford to be patient before tightening policy.
Still, there was a chance the data marked a turning point in the long downtrend in inflation.
"The bond market took this report as a sign that core inflation may be bottoming and the Fed may still be in the tightening business later this year," said Cary Leahey, senior U.S. economist at Deutsche Bank Securities.
"But you probably need to see at least two out of the next three core CPI readings to be up 0.2 percent or more to say that you've bottomed," he added.
The headline consumer price index rose 0.5 percent in January compared to forecasts of a 0.3 percent rise, but much of the gain was due to higher energy prices which are seen as more of a tax on the consumer than a sign of demand pressures.
Stripping out fuel and food prices, the CPI rose 0.2 percent, a little above the 0.1 percent expected. That still left the annual rate of core inflation at 1.1 equaling its lowest level since 1966.
Still to speak on Friday is Fed Governor Ben Bernanke, one of the more influential board members as far as the market is concerned. He talks on "The Great Moderation: The Decline in Output and Inflation Volatility Since the 1970s" around 12:45 p.m. (1745 GMT.)
Fed Chairman Alan Greenspan is also speaking though the subject of his speech, "Education's Critical Role in the Nation's Economy," suggests he may not mention policy
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