Interest Rate Roundup

Wednesday, October 11, 2006

Bond selloff, day 4

We just closed another nasty day in the bond market. Long bond futures have now declined four days in a row -- 16/32 on 10/5, 30/32 on 10/6, 17/32 on 10/10, and 11/32 today. What's going on? The Fed is trying to beat it through bond traders' thick skulls that there will NOT be a rate cut anytime soon. Sure, some radical swing in the economic data could change things. But right now, Fed officials are just fine with the slowdown in housing ... are sanguine about it spreading to the rest of the economy ... and worried that even with a slowdown, inflation pressures won't ease enough for them to truly relax.

Three key passages from the Sept. 20 Fed meeting minutes:

1) “Recent rates of core inflation, if they persisted, were seen as higher than consistent with price stability, and participants underscored the importance of ensuring a moderation in inflation.”

2) “Members continued to see a substantial risk that inflation would not decline as anticipated by the committee.”

3) “Several participants worried that inflation expectations could rise and the Federal Reserve’s willingness to carry through on its intention to seek price stability could be called into question.”

I have pointed out for a while now that a HUGE amount of hot money has poured into the market, betting on a bond price rise. That money seems to be running out equally fast now.


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