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Treasuries strengthen after Fed decision

February 01, 2007 | Financial Times

US Treasury bond prices strengthened on Wednesday after the Federal Open Market Committee’s statement appeared to somewhat downplay inflation fears while at the same time upgrading its assessment of the outlook for the US economy.

The Fed left overnight interest rates steady at 5.25 per cent as expected, but made changes to its statement. It said economic growth was “somewhat firmer”, helped by “stabilisation” in the housing market, while readings on core inflation had “improved modestly”. Nonetheless, the committee still sounded its familiar note of caution, saying inflation risks remain.

Richmond Fed president Jeffrey Lacker, a dissenter in recent FOMC meetings, has rotated out of voting status, and Wednesday’s vote was unanimous.

“The FOMC statement has changed more materially than recent meetings but the essence of the statement is that they have upgraded the growth outlook/risks and downgraded the inflation risks,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Bonds had already gained on the day. Data showing that US gross domestic product grew at a rate of 3.5 per cent in the fourth quarter, above expectations, initially weighed on bonds.

But later figures showed that business activity in the US Midwest contracted in January. Chicago’s purchasing managers’ index had its lowest reading since April 2003.

Shortly after the release of the statement, the yield on the 10-year Treasury was down 3.3 basis points to 4.843 per cent, while the two-year yield was down 2.9bp at 4.946 per cent.

European government bonds largely tracked the movements in the US Treasury market after finding little direction from mixed eurozone economic data.

In late trading in London, the 10-year Bund was yielding 4.099 per cent, down 0.4bp. The yield on the two-year Schatz was down 0.3bp at 3.958 per cent.

UK gilt prices were mixed, with the yield on the 10-year gilt down 1.1bp to 4.979 per cent and the yield on the two-year up 0.2bp to 5.483 per cent.

Prices rose on Japanese government bonds on news of a fall in wage earners’ cash earnings. The figures highlighted companies’ reluctance to raise salaries, despite record profits. The yield on the two-year, which is highly sensitive to interest rate expectations, slipped 1.5bp to 0.725 per cent.


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