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Treasuries Winch Down Before Fed Speaks

Tuesday, August 12, 2003 11:14 a.m. ET

By Amanda Cooper

NEW YORK (Reuters) - U.S. Treasury prices slunk lower in anticipation of an upbeat report from the Federal Reserve later on Tuesday on the fledgling economic recovery.

The Fed is expected to keep U.S. interest rates unchanged at their four-decade low of 1.00 percent, but it is the Fed's policy statement that could put a cat among the pigeons.

The tentative improvement in some economic indicators is signaling that after a prolonged period of sluggishness the U.S. economy is picking up, perhaps enough to warrant optimism from the Fed.

In principle the central bank is seen sticking to its line that the overall risks to the economy are still skewed to the downside because of the concern about possible deflation.

The key for the bond market will be what the Fed says about the time-frame for moves in interest rates.

The Fed has pledged to keep rates as low as it can for as long as possible to promote growth but most analysts are ruling out another cut and expect the next move to be upward at some point next year.

"Since the Beige Book came out, it has been accepted that the Fed will have to acknowledge stronger growth, that's no secret," said Mark Mahoney, interest rate strategist at UBS.

"The story here is how strong will its comments be about the risk of an unwelcome decline in inflation and as such, what is the expectation for rates staying on hold for an extended period," he said.

YIELDS TICK HIGHER

After paring some losses overnight, Treasury yields backed up as investors staged a last-minute scramble to square their positions ahead of the Fed's statement later.

Snippets of minor economic data also chipped away at the early gains in bonds.

Instinet Research said in its weekly Redbook survey that sales at major U.S. chain stores rose by 3.1 percent in the week to August 9, compared with the same week a year ago, after rising by 2.6 percent in the previous week.

Meanwhile, the Richmond Federal Reserve reported its July services index rose to 29 in July from -17 in June, while its manufacturing index slid to -7 from 1 the month before.

Investors settled back to wait for the Fed's decision on interest rates around 2:15 p.m. EDT (1815 GMT) when its monetary policy committee concludes a one-day meeting.

"There's not a lot of confidence in what the Fed says. If you'd acted on what you think they said in the last few months you'd have got pretty badly hurt," one trader said earlier.

The 10-year Treasury note's yield <US10YT=RR> was last up three basis points at 4.39 percent, showing a drop of 9/32 in price, while five-year notes <US5YT=RR> were yielding 3.27 percent, down 5/32 in price, versus 3.26 percent on Monday.

Two-year notes <US2YT=RR> were little changed at 1.77 percent, while the 30-year bond <US30YT=RR> was yielding 5.29 percent, down 11/32 in price from 5.27 percent on Monday.

The next big event on the bond market calendar is the release of data from the Commerce Department on retail sales, which is due on Wednesday at 8:30 a.m. EDT (1230 GMT).

Consumer spending is expected to have increased sharply in July thanks to the government's tax cuts and low interest rates. A strong reading could depress bonds.

Economists polled by Reuters are forecasting a 0.9 percent rise in July retail sales, up from a 0.5 percent rise in June.


Copyright © 2003 Reuters Limited.