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Treasuries fall as fed raises rates over inflation Original Source Link: (May no longer be active)
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Treasuries Fall as Fed Raises Rates, Cites Inflation Pressure
March 22 (Bloomberg) -- U.S. Treasury notes tumbled after the Federal Reserve raised its benchmark interest rate and indicated it is concerned about faster inflation, which erodes the value of fixed-income payments.
The central bank boosted its target for the overnight lending rate between banks to 2.75 percent from 2.5 percent, and said ``pressures on inflation have picked up in recent months.'' It restated a plan to carry out further increases at a ``measured'' pace, a sign to some strategists the Fed may raise rates at each of its six remaining meetings this year.
``What we have here is a Fed that is still going to increase interest rates,'' said Pat Maldari, who is part of a team that invests $185 billion in fixed-income assets for Merrill Lynch & Co.'s investment management unit in Plainsboro, New Jersey. ``The bond market is having a natural reaction to the Fed's statement that inflation risks have increased.''
The benchmark 4 percent note maturing in February 2015 fell 3/4, or $7.50 per $1,000 face amount, to 95 1/32 at 3:15 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield rose 10 basis points to 4.62 percent, back near the highest since July. A basis point is 0.01 percentage point. The note was up 3/8 of a point before the announcement, pushing the yield down to as low as 4.47 percent.
Yields on shorter-maturity debt, more sensitive to changes in monetary policy, rose to the highest since 2001. The 3/8 percent note maturing in 2007 fell 3/16 to 99 5/32, as its yield added 11 basis points to 3.82 percent, the highest since 2001. The yield is up from 2.82 percent the day before the Fed started boosting rates in June.
Fed Statement
The rate increase was the Fed's seventh since June, and it was expected by all but five of 105 economists polled by Bloomberg. Today's increase brings the target to its highest since just after the Sept. 2001 terrorist attacks, when the central bank cut the rate to 3 percent from 3.5 percent.
``The stance of monetary policy remains accommodative,'' the Federal Open Market Committee said in a statement released after the meeting in Washington. ``Pressures on inflation have picked up in recent months and pricing power is more evident,'' the Fed said. ``The rise in energy prices, however, has not notably Fed through to core consumer prices.''
``This is a fairly explicit kind of hawkish shift in the economic message,'' said Dominic Konstam, head of interest-rate strategy at Credit Suisse First Boston in New York. ``They're saying, `Inflation isn't running away from us, but we're going to make sure it doesn't run away by raising rates more than you think.'''
Interest-Rate Futures
Yields on interest-rate futures rose, indicating traders raised expectations for how much more the rate may rise this year. The September Eurodollar futures contract's yield increased 8.5 basis points to 3.99 percent. The contract settles at a three- month lending rate that has averaged 21 basis points higher than the Fed's target over the past 10 years.
Eurodollar futures ``are increasing the chance the Fed raises rates at every single meeting this year'' in quarter-point increments, rather than skipping some meetings,'' Konstam said.
Treasury yields rose in the past month on speculation recent increases in commodity and wholesale prices might prompt the Fed to indicate it might raise rates more than investors expected. Treasuries also fell after Fed Chairman Alan Greenspan last month called the decline in 10-year yields since the Fed started raising rates a ``conundrum.''
The earlier gains afforded traders an opportunity to sell at higher prices for the first time in three days.
Investor Focus
Most investors before the decision were focused on whether the Fed would retain the word ``measured.'' A survey of investors late last week by bond-research firm Ried, Thunberg & Co. found 70 percent expected the central bank to again say it can boost rates at a ``measured'' clip.
This may be the last meeting the word stays. A Fed survey released March 9 found companies ``indicated greater ease in passing along price increases'' to consumers. At their last meeting, on Feb. 2, policy makers said expectations for inflation ``remain well contained.'' The Fed next meets May 3.
A Labor Department report today showed wholesale prices, excluding food and energy, gained 0.1 percent in February, compared with a 0.8 percent rise the prior month. Overall producer prices rose 0.4 percent, up from 0.3 percent.
A report tomorrow may show consumer prices climbed 0.3 percent last month, faster than the 0.1 percent increase in January, according to the median estimate of 75 economists in a Bloomberg poll.
Net Shorts
Hedge-fund managers and other large speculators increased their net short positions in 10-year note futures in the week ended March 15, according to U.S. Commodity Futures Trading Commission data on March 18.
Speculative short positions outnumbered long positions by 147,054 contracts on the Chicago Board of Trade, the most since August. Three weeks before, long positions outnumbered short by 86,920 contracts.
Investors who are short have positions that would benefit from a drop in the prices of securities.
Ten-year yields have been little changed on days of the Fed's last five rate increases, rising or falling 3 basis points or less. Yields on two-year notes, which are more sensitive to changes in monetary policy expectations, rose an average 3.6 basis points
Last Updated: March 22, 2005 15:20 EST
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