At 2:13 p.m., the bond trading desk at Barclays Capital Inc. goes quiet.
All eyes focus on news headlines blinking across computer screens as traders wait for the Federal Reserve to announce its decision on short-term interest rates.
Everyone expects a quarter-point bump. But what else will the Fed say? Will it hint at the need for bigger, faster rate increases in the near future to fend off inflation?
Paul Calvetti, 37, head of government bond trading at Barclays, expects the Fed statement to be "dovish," nodding at the need to watch inflation but still promising rate increases at a "measured pace."
But he does not think the market will buy it. He thinks bond investors will reject the Fed's language and continue worrying that inflation will cut into the value of fixed-income payments and that existing bonds' prices will fall as new issues come on the market at higher rates.
On the trading desk, Calvetti is an island of calm as younger traders around him bark nervous wisecracks as the Fed announcement nears.
"One minute, boys," says trader Adam Brown, 29, fingers poised over his keyboard at 2:14, a minute before the announcement is supposed to arrive.
Then the zero hour hits. But no news. Tension rised. The clock ticks to 2:17.
"This has been the longest two minutes ever," Calvetti grunts. "It feels like two years."
Then it comes. The Fed, as expected, raises its target for overnight loans between banks from a historic low of 1 percent to 1.25 percent. No surprise there.
Then traders begin yelling excerpts from the Fed's statement as they appear on news wires. "Pace still measured!" bellows one. "Due to transitory factors," hollers another, referring to Fed language describing its view of at least a portion of the recent uptick in inflation.
The market reacts positively, and bond prices, which already had been rising during the day, continue to climb as yields drop. (The yield is calculated using the bond's stated interest rate and the price paid to buy it on the open market. A bond selling at a discount to face value has a higher yield.)
Calvetti views the rally as an opportunity to do some selling, particularly on "short" maturities, such as two-year and five-year Treasury notes, since he is betting prices will go down.
But Calvetti sells too soon. The rally continues and bond prices finish the day higher with the yield on the 10-year note falling to 4.59 percent, its lowest since May 5, and the yield on the two-year note falling to 2.69 percent, the lowest point since June 9, according to Bloomberg News.
"I did [poorly]," Calvetti said after the market closed. "Basically I thought the market would reject the dovish language. But for now it appears people believe in the Fed."
That seemed to be the message across the financial markets Wednesday, as stocks also finished the day modestly higher.
Laurence G. Kantor, chief economist at Barclays, said that the reaction in the stock and bond markets was just what Fed Chairman Alan Greenspan hoped for.
"This is just about as close to the script as you can get," he said, gesturing at very muted activity on the Barclays trading floor Wednesday afternoon.
Traders and money managers said the quiet reaction was the result of the Fed's meticulous efforts to warn financial markets that higher rates were coming to fight inflation but would be slow enough not to derail the economic recovery.
That communications strategy was put in place in part to avoid a repeat of the last rate-tightening cycle in 1994, when markets were caught off guard by the pace of Fed increases, resulting, among other things, in the bankruptcy of Orange County, Calif., which bet the wrong way on rates.
This time, the Fed's many statements have led to a steady, months-long rise in longer term rates for many types of consumer and business borrowing. The long bull market in bonds ended a year ago, with the yield on the 10-year Treasury rising steadily from its June 13, 2003, low of 3.11. Yields on the five-year and two-year notes doubled in the past year.
"This has been the most telegraphed decision in the history of [the Fed]," Wells Fargo chief economist Sung Won Sohn said in a note to clients Wednesday. "The Federal Reserve has a new policy of transparency and kept its word. In the foreseeable future, the market won't be caught with its pants down as was the case in 1994."
However, Michael Ashton, an inflation derivatives trader at Barclays, said the possibility still exists that rising interest rates could cause at least some meltdowns in the market, particularly in an era when so many big hedge funds -- lightly regulated investment pools for the wealthy -- make complex and heavily leveraged bets. Leverage refers to using borrowed money to make an investment.
"Warren Buffett said it best. 'It's only when the tide goes out that you know who was swimming naked,' " Ashton said.
Nonetheless, consumers and corporations have been moving away from bonds in advance of the expected rate-tightening cycle. Investors pulled $6.9 billion from taxable bond mutual funds last month, according to Robert Adler of AMG Data Services.
And after gorging on cheap debt over the past several years, corporations cut back on bond issuance in the second quarter. According to data compiled by Bloomberg News, companies sold $121 billion in bonds and notes in the quarter, down 34 percent from the first quarter and the smallest amount since the first three months of 2002.
At Barclays, meanwhile, Calvetti said he was convinced that Wednesday's trading was an anomaly and that his belief that bond prices will fall and yields will rise will be vindicated. "We'll just see how it plays out over the next couple days," he said.
Calvetti is head of government bond trading at Barclays. John Roberts, a managing director at Barclays Capital, predicts that more investors will buy Treasury inflation-protected securities.Michael Ashton, an inflation derivatives trader at Barclays, said rising rates could still cause meltdowns in the market, particularly at big hedge funds. Paul Calvetti, Barclays' head of government bond trading, thought markets wouldn't buy Fed promises on increases, a bet that didn't pay off yesterday.