Treasury bond investors give up hope on lower rates


October 16, 2006/ punch




Treasury bond investors, who forecast lower interest rates two weeks ago, now see no chance the Federal Reserve will reduce borrowing costs until late next year as policy makers continue to warn about the threat of inflation.

Interest-rate futures show traders expect the Fed to keep its target for overnight loans between banks at 5.25 per cent.

Fed funds futures traded on the Chicago Board of Trade projected 20 per cent odds of a cut two weeks ago. Last month, the contracts suggested a 50 per cent chance for lower rates.

Treasuries posted their biggest weekly decline in four months after Fed Chairman Ben S. Bernanke and other policy makers suggested they are unlikely to cut borrowing costs.

Yields on 10-year notes, which had declined to seven-month lows on speculation the housing slump would cool the economy, jumped the most since June after reports showed rising consumer confidence and retail sales.

“The bond market was anticipating a bigger slowdown,” said Joe Balestrino, who helps manage $22bn in Pittsburgh

at Federated Investors Inc. “Bernanke and company have clearly sent a message that the market has misinterpreted what they think.’’

Yields on 4 7/8 per cent Treasury notes due in August 2016 climbed 11 basis points, or 0.11 percentage point, last week to 4.80 per cent. The price, which moves inversely to the yield, fell about 3/4, or $7.50 per $1,000 face amount to 100 18/32.

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