Bond Prices Rise; Inflation Worries Ease

The Associated Press
Friday, May 19, 2006; 6:13 PM

NEW YORK -- Longer-term bond prices rose Friday, as inflation anxieties were scaled back following some hawkish remarks from Federal Reserve officials.

The yield curve _ or the difference between the yields of shorter- and longer-dated Treasury issues _ continued to flatten.

At 5 p.m. EST, the 10-year note was up 1/32 from Thursday. Its yield was virtually unchanged at 5.06 percent. Bond prices and yields move in opposite directions.

The 30-year bond was up 12/32. Its yield fell to 5.14 percent from 5.17 percent.

The 2-year note was down 2/32, yielding 4.97 percent, down from 4.91 percent.

Yields on 3-month Treasury bills were 4.83 percent, down from 4.84 percent as the discount rate was unchanged at 4.71 percent.

Scott Gewirtz, head of Treasuries trading at Lehman Brothers in New York, said the flattening of the yield curve followed some inflation-bashing talk from Fed officials, including Richmond Federal Reserve President Jeffrey Lacker, who said Thursday he was "disappointed" by the recent uptick in inflation.

"I think the Fed is sending out different signals now than they were two weeks ago. At that time, what thery were trying to say is that in the past, the Fed has tended to overshoot and that they wanted to avoid doing so" this time, Gewirtz said.

Now, having seen the market worry that the Fed may fall behind the curve if it pauses in June, officials are stressing that "you've got to keep a lid on inflation expectations," Gewirtz said.

But adding to the uncertainty over what the Fed will do next, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, told The Wall Street Journal on Friday the central bank must be mindful of the lagged impact of its rate tightening and the risks of "overshooting" with future rate hikes.

The comments helped lead to some selling at the long-end of the curve, which lifted the 10-year rate off its session lows.

Nonetheless, overall Friday, investors continued to ratchet up their expectations of a Fed hike at its June 28-29 meeting. The July federal funds futures were pricing in around a 60 percent chance of the U.S. central bank lifting rates for the 17th meeting in a row.

© 2006 The Associated Press