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Weary bond heads south
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July 30, 1999: 9:16 a.m. ET
Income data add insult to ECI injury, and weak dollar doesn't help
By Staff Writer Robert Scott Martin
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NEW YORK (CNNfn) - Treasury bonds limped deeper into negative territory Friday, hamstrung by sharpening interest rate fears and the dollar's inability to recover its footing against other global currencies.
Shortly before 9 a.m. ET, the benchmark 30-year Treasury bond lost 13/32 of a point in price to 88-10/32. The yield, which moves in the opposite direction, edged up to 6.10 percent from Thursday's closing level of 6.07 percent.
Sentiment remained gloomy in the aftermath of sharp selling the day before, when an unexpectedly robust upturn in the employment costs index (ECI) pushed yields back to levels last seen a month ago.
The ECI, a broad quarterly gauge of wage inflation in the U.S. economy, jumped 1.1 percent in the second quarter, climbing faster than economists had led investors to expect. The news further fed the bond market's growing conviction that signs of resurgent inflation will prompt aggressive interest rate hikes, perhaps starting as early as next month.
On Friday, news that personal incomes also had climbed faster than the bond market had expected added to investors' inflation fears. The income statistic jumped 0.7 percent in June, accelerating from a revised figure of 0.3 percent in May.
The last of the economic hurdles the market will face this week will be the New York component of the monthly National Association of Purchasing Management (NAPM) manufacturing survey, due at 9 a.m. ET, and June new home sales data due an hour later. If either report shows significant gains, already beleaguered bond traders are likely to take the statistics as yet another sign of inflation ahead, lightening their portfolios even further to cut their expected losses.
Inflation hurts the bond market both by biting into the real value of the fixed returns bonds offer and by encouraging the Federal Reserve to raise interest rates. Higher interest rates, in turn, make bond yields less attractive to investors compared with savings accounts, certificates of deposit or cash.
Dollar in decline, fueling bond selling
The dollar continued its own downward path, robbing the Treasury market of support from overseas.
In early U.S. trading, the greenback slumped to 115.14 yen after sliding as low as 114.98 yen overnight. The euro, however, eased to $1.0693 as traders locked in the European currency's recent gains to 10-week highs.
The fundamental reason for the dollar's decline against the yen remained the market's newfound confidence in the Japanese economy. Once saddled by recession, Japan has rebounded into expansionist mode, prompting investors worldwide to jump into Japanese stocks and the yen needed to buy them.
"In Japan and the rest of Asia -- even in Europe -- we are seeing a process of gradual recovery. That is bad news for the dollar and it has started the dollar down," said David Jones, president and chief economist at Aubrey G. Lanston. "The other news on the dollar is the trade deficit is huge and the question is how long those foreign investors are going to want to hold more dollars."
As the dollar declines, global traders find the dollar-denominated returns offer less attractive compared with gains measured in stronger currencies. As a result, inflows into the Treasury market dry up, leaving bonds starved for demand and yields rising to compensate.
Moreover, and potentially more damaging to the bond market, Jones noted that the dollar's weakness could continue unless the Fed raises interest rates to make the sagging greenback attractive again.
"It might get to the point where they say, 'Hey, look, if you want me to hold more dollars, you've got to pay a higher interest rate,' and that's exactly the process I think we are in now." 
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