Posted by John_NorCal on 9/24/07 9:36am
Msg #212761

Monday morning T-Bill update

Treasurys fall as inflation fears persist
Concern that the Federal Reserve's rate cut will drive up inflation keeps investors wary of long term bonds.
September 24 2007: 9:47 AM EDT


NEW YORK (AP) -- Treasury bonds fell early Monday, sending yields higher, as investors focused on the prospect that last week's sharp cut in U.S. interest rates will result in spiraling inflation.

In general, stocks have risen while Treasurys have been driven lower in the wake of the Federal Reserve's decision Tuesday to reduce the federal funds rate and the discount rate by a half percentage point.

The federal funds rate is what banks charge each other for short-term loans, while the discount rate is what the Fed charges for loans to banks.

The stock market has focused on the positive implication that less expensive money will stimulate growth, while the Treasury market has fretted over inflation. Cheapening the cost of money tends to tempt sellers to lift prices, setting off inflation, which the Treasury market detests.

"Fixed-income markets, after initially rejoicing, are now feeling the wrath of the bonds vigilantes," wrote economists at Action Economics.

The benchmark 10-year Treasury note fell 4/32 to 100 26/32 with a 4.65 percent yield, up from 4.63 percent at Friday's close. Prices and yields move in opposite directions.

The 30-year bond lost 5/32 to 101 18/32 with a 4.89 percent yield, little changed from Friday's close.

The 2-year note slipped 2/32 to 99 27/32 with a 4.08 percent yield, up from 4.05 percent on Friday.

The highlight of Monday's session is likely to be a speech by Fed Chairman Ben Bernanke. Investors will parse the speech for clues about whether the Fed is leaning toward putting more rate cuts in place.

"The Treasury market is trading slightly lower this morning as traders abroad try to figure out what should be their next move when it comes to owning bonds," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

"The bigger question to be answered: should they own bonds at all at these levels? The likely answer depends on which maturity you think best matches your rate forecast." Giddis said.

Investors who believe the Fed will continue to ease credit and push the federal funds rate lower, will probably want to purchase short-term notes with a maturity of no longer than 5 years, in his view.

"If you feel that the Fed will take a break, look at the economic growth with a critical eye, and only cut rates again when it feels that the economy is about to go into a recession, then you would likely benefit from buying bonds on the longer end of the yield curve," Giddis said.

Investors tend to buy longer-dated bonds when the economy appears weak and there is a solid motive for loaning money long-term.