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The rally may not be over
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November 13, 1996: 7:30 p.m. ET
Bond market feeding on subdued inflation, overseas demand
From Correspondent Ceci Rodgers
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CHICAGO (CNNfn) - The bond market took a breather Wednesday after its recent explosive rally.
A powerful combination of subdued inflation, a moderating economy and overseas demand for treasury securities has been pushing up prices and sending long-term interest rates lower. The big question remains; where will rates go from here?
Overall, the wholesale inflation rate rose 0.4 percent due almost entirely to climbs in the volatile food and energy components. The core rate, which measures inflation without food and energy, actually fell 0.3 percent.
Bond traders reacted by sending the yield on the benchmark 30-year Treasury bond to a new eight-month low of 6.42 percent before retreating back to 6.45 percent.
Mike Boss, bond futures trader at Aubrey G. Lanston, said the good times for bonds may not be over yet. (178K WAV) or (178K AIFF)
Since late October, long-term rates fell from 6-7/8 percent to just under 6-1/2 percent, a move that caught many by surprise. One factor, experts say, is a huge influx of overseas buying. Interest rate differentials favor U.S. treasuries and Europeans are optimistic about the chances of a balanced budget agreement in Washington.
The Federal Reserve, which was leaning toward a tighter monetary policy over the summer, has shifted into neutral, deciding Wednesday to leave interest rates unchanged.
"The numbers we've seen over the past few months have to make them feel better about their stance in monetary policy. It will allow them to remove some of the pressure they feel to maybe raise rates, and in effect move toward lowering rates," said Brian Wesbury, economist at Griffin, Kubick, Stephens and Thompson.
That's good news for the housing market and homebuyers. The average rate for a 30-year fixed-rate mortgage has dropped to about 7.75 percent which has led to a 30 percent hike in the number of homeowners refinancing their existing mortgages.
Bond strategists say they are worried about the unbridled optimism in the market. It isn't clear yet whether the economy will keep slowing or have a burst of growth from the holiday shopping season. That means many will have a sharp eye trained on Thursday's retail sales report.
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