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Treasuries up amid less than expected inflation talk by FOMC
Treasuries are up this afternoon following the release of the Fed meeting minutes.
The minutes mentioned that some monetary policy committee members felt that "inflation
pressures could be intensifying," but the minutes did not seem to convey a sense of
urgency regarding these inflation concerns.
(FOMC MINUTES)
In any case, traders in both the bond and stock who had taken defensive positions
prior to the release of the minutes were relieved by the news and the relief has
translated into a round of buying. The 10-Year Treasury Note is currently up by
15/32, lowering its yield to 4.37% and the Dow, which had been down by as much as
87.64 points, is currently up by 38.05 points.
10:30 AM EDT :
Treasuries are lower this morning following two winning sessions (for the 10- and 30-year maturities).
Stocks are also down as the economic release of the morning bodes ill for the economy and the value of
the dollar.
The Commerce Department reported that the seasonally adjusted value of imports exceeded that of exports
by a record $61.0 billion in February. January's deficit figure was also revised up slightly to $58.5
billion from the originally reported $58.3 billion. The widened gap in February was a result of a 1.6%
increase in the value of imports while the value of exports remained flat (0.0%). In fact, the value
of exports has only risen by 0.1% since December, though the level has hit successive record highs in
the last three months. In that time, the value of imports has increased by 3.4%, posting successive
record highs in the last two report months.
Since net exports constitute a component of gross domestic product, the high negative figure subtracts
from the growth rate. This could act as a plus for bonds since it reduces pressure on the Fed to raise
rates. However, the trade imbalance also weighs on the dollar and a weaker dollar dulls the allure of
dollar-denominated investments such as Treasuries. The situation is particularly pertinent this week
as the Treasury will be auctioning $15 billion in 5-Year Notes tomorrow and $9 billion in
inflation-protected, 10-Year Notes (TIPS) on Thursday. The auctions are already a negative for the
market on a supply and demand basis but nervousness over the extent of foreign participation is
providing additional pressure on the market.
Both bond and stock traders are also wary of what the minutes of the last Fed policy meeting (due to be
released this afternoon) may reveal. The statement released at the conclusion of the meeting jolted
the markets with the comment: "pressures on inflation have picked up in recent months and pricing power
[the ability of businesses to raise prices] is more evident." This suggested that the monetary policy
committee is preparing to step up its interest rate-hike activity. And although the suggestion is now
out, any confirmation of inflation concerns within the minutes will only aggravate rate-hike anxieties.
Also this afternoon, the Treasury will release its budget figures for last month. They are expected to
reveal a shortfall in receipts versus outlays that will be close to the $72.9 billion deficit posted in
March of 2004. High budget deficits work against Treasuries since they signal increased supply
pressures ahead.
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