Treasury bond prices fell for third consecutive session
30-year Treasury bond yield rose to December high of 6.33%
Oil prices increased to $25.80 per barrel
Retail sales increased 0.9%
Industrial production showed strongest manufacturing growth in a year
Dollar mixed: rose against yen (to 103.68) but fell versus euro ($1.0069)
Fed meeting scheduled for Dec 21, with rates expected to remain at 5.50%
Opinion
The market's behavior suggests a significant misalignment between bond traders' inflation fears and actual economic conditions. While multiple economic indicators show strength, the almost reflexive selling in bonds appears overdone, especially given the Fed's demonstrated commitment to containing inflation through three previous rate hikes. The market's hypersensitivity to inflation signals may be creating unnecessary volatility and potentially distorting the true risk-return relationship in fixed income markets.
Core Sell Point
The bond market's exaggerated reaction to economic strength indicators reveals a concerning disconnect between perceived inflation risks and actual economic fundamentals, potentially creating unwarranted market volatility and mispricing of fixed income securities.
Treasury bonds fell for the third straight session Wednesday, pushing yields to the highest levels of the month, as a series of inflation-suggesting factors kept alive fears of another Federal Reserve interest rate hike ahead. Just before 3:15 p.m. ET, the price of the benchmark 30-year Treasury bond fell 13/32 to 97-5/32. Its yield, which moves inversely to the price, rose to a December high of 6.33 percent, from 6.30 percent Tuesday. Explaining the day�s losses, analysts cited a host of signs of strong economic growth that could ignite inflation and prompt the Fed to raise interest rates again. "Where�s the (economic) slowdown?� asked Josh Stiles, bond market strategist at IDEAGlobal.com. "We�re not seeing it.� Negatives include rising oil prices, surging stock markets and fears that Thursday�s trade report could lead to an upward revision of the nation�s gross domestic product. Light sweet crude oil for February delivery gained 35 cents to $25.80 a barrel Wednesday, igniting fears that gains in the widely used commodity will show up in closely watched inflation gauges like the Consumer Price index. Stocks rose again Wednesday, in a phenomenon that economists say creates the kind of paper wealth that leads to increased consumer spending. "Bonds are reacting a little poorly to the rebound in equities,� said Bruce Alston, who manages $1.5 billion in bonds for Value Line Asset Management. Just Tuesday, retails sales jumped a larger-than-expected 0.9 percent, prompting a major bond market sell-off. Wednesday�s data did not help. U.S. industrial production rose steadily in November as manufacturing businesses hit their fastest stride in a year. Tony Crescenzi, bond analyst at Miller Tabak & Co. mentioned a concern that Thursday�s international trade report for October could show a trade deficit wide enough to prompt an upward revision in the nation�s gross domestic product. "If the trade deficit is reported lower than the consensus estimate of $24.2 billion, this will force GDP estimates still higher toward 6 percent -- a level reached just four times in the past 15 years,� Crescenzi said. That would only add to the view that the Fed, the nation�s central bank, will have to raise rates again to cool an overheating economy. Fed officials gather Dec. 21, but with the meeting so close to potential Y2K worries they are expected to keep their main lending rate unchanged at 5.50 percent. But analysts say a rate hike likely will come at the next Fed gathering in February unless the economy shows signs of slowing. The Fed tightened credit three times since June in a bid to preempt inflation and stem the rapid pace of economic growth. Dollar mixed The dollar kept to a tight range Wednesday, rising modestly against the yen but falling slightly versus the euro. Analysts cited no fresh fundamental reasons behind the day�s limited dollar movements. Just before 3:15 p.m. ET, the euro rose to $1.0069 from $1.0056 Tuesday. Despite the slight gains, analysts say another test for the euro below dollar parity is still possible as long as the U.S. economy continues to outperform Europe�s. "The U.S. economy's strong rate of growth combined with low inflation remains very dollar supportive,� Ruesch International said in a note to clients Wednesday. �Parity in euro/dollar remains a very realistic objective for traders today.� The battered euro, which has lost about 16 percent of its value since its January inception, first fell below $1 two weeks ago. The dollar, meanwhile, rose to 103.68 yen from 103.45 Tuesday, continuing a trend begun Monday.
